A further hardening in commercial lines this financial year will contribute to expanding insurer margins, according to an annual industry report by Finity Consulting.

Ongoing expense reductions are expected and the reinsurance market is likely to remain soft despite the active Atlantic hurricane season, while the industry is also tackling profitability issues in the motor business.

“Prior-year reserve releases from long-tail classes will continue to prop up reported margins – although not necessarily at levels seen in the past few years,” Finity Principal Andy Cohen says.

The forecasts feature in Finity’s annual general insurance “state of the industry” review, renamed Optima after previously being called the Pendulum report.

It says the industry had a reported insurance margin of 14% last financial year and a return on equity (ROE) at the same level. The underlying insurance margin was about 10%, adjusted for reserve releases and other factors. Premiums grew 4% overall.

A number of classes continue to lag the 15% ROE profitability target, while commercial property and directors’ and officers’ were major loss-makers last year.

“What we have seen in the first half of this calendar year is a hardening of rates in areas where they do need to harden,” Mr Cohen told insuranceNEWS.com.au.

Corporate property premiums are expected to jump 10%, up from 3% previously, while business package rates may increase 4%, compared with previous 2% increases.

“The clear fly in the ointment, though, is compulsory third party, where we expect premium volumes and underlying current-year profitability to decrease significantly,” Mr Cohen said.

The underlying insurance margin for the current year is forecast at 10-11%.

See ANALYSIS.