Premiums for compulsory third party (CTP) motor insurance must rise for schemes to remain viable at a time when bond yields are falling, Suncorp says.

In a “white paper” explaining the relationship between interest rates and CTP premiums, Suncorp Commercial EGM Statutory Portfolio Chris McHugh says regulators in Queensland have not let premiums rise to offset lower interest rates, unlike in NSW and the ACT.

“It’s important to act before the market is distorted to the extent that every time an insurer writes a CTP policy, they’re losing money,” Mr McHugh says.

The paper says yields on bonds held by insurers to pay claims are particularly important in CTP because claims can be long-tail. Between January 2011 and last month, five-year bond rates have fallen from about 5.2% to 2.5%.

“Adopting the rule of thumb that stipulates a 1% drop in bond yields requires a 4% rise in premium to compensate, this 2.7% drop would necessitate approximately a 10.8% rise to maintain profitability,” it says.

Over the same period, the CTP upper price limit in Queensland has risen by $5.80, or 1.9%. A $5 rise in October will take the total to $10.80, or 3.5%.

NSW rates have risen by $23, or 5%, between December 2010 and June this year.

“As bond yields have dropped, prices in NSW have steadily risen, yet in Queensland prices have remained relatively flat,” the paper says.

Queensland sets an upper price limit through its scheme of quarterly adjustments for 24 vehicle classes. The paper says for the past three quarters all six insurers in the scheme have nominated a premium at the class-one upper limit “meaning that there is effectively zero price competition in the Queensland CTP class-one market”.

A Suncorp spokesman told insuranceNEWS.com.au premiums do fall when bond rates are high.

The company estimates that private insurers in the Queensland and NSW CTP schemes hold about $15 billion in reserves, risk margin and capital.

“Despite being largely invested in relatively low-risk and low-yielding instruments, the revenue generated from this investment is significant,” the paper says.

Suncorp notes investment income is just one aspect of premium pricing, but says “when bond yields change rapidly and significantly, it becomes a highly influential ingredient”.