Overall return on equity (ROE) for insurers will exceed 10% over the medium term, S&P Global Ratings has predicted in a moderately upbeat report on the industry’s outlook.

S&P uses ROE as an indicator of profitability, and says the industry has achieved an average 10.8% ROE over the past five years.

Hardening rates and efforts to ramp up efficiency are the key factors that will underpin the sector going forward, the ratings agency says.

These same factors will help the industry to ride out the temporary blip caused by last summer’s Townsville flood catastrophe and hailstorms in NSW and Queensland. The events impacted insurers’ earnings as ROE declined to 7% in the year to September.

“We expect market growth prospects for the Australian property and casualty market to be moderate, with growth to benefit from some further rate hardening and supplemented by the return of unit growth,” the ratings agency says.

“Further rate hardening in commercial lines will be added to with moderate rate growth across home and contents and domestic motor reflecting claims costs. Claims have recently been affected by natural perils and higher repair costs.”

From now to 2021, gross written premium in personal and commercial lines is projected to increase at a moderate pace on the back of incremental rate rises and stable unit growth.

S&P rates the industry risk as low, supported by sound profitability and a strong institutional framework.