Insurance profits grew 4% to $5 billion last financial year, building on the previous year’s 25% jump, and further improvement is expected amid a long-awaited upswing, KPMG says.

Gross written premium decreased 1% to $42.75 billion as NSW compulsory third party regulatory impacts offset rising premiums in other consumer and commercial classes.

Excluding compulsory third party, gains were about 3-4%.

“While the industry’s headline profit growth figure appears modest, it must be remembered that this was on the back of an exceptionally strong performance [the previous] year,” KPMG Insurance Partner Scott Guse said.

“To maintain that level rather than falling back is actually a very creditable showing.

“Favourable net perils experience and higher-than-expected reserve releases contributed to this result, which reinforces our view that the sector is on a cyclical upswing.”

Rate rises are forecast to continue this year in personal and commercial classes, but the industry is still achieving profit returns below levels seen in 2012, 2013 and 2014.

The combined operating ratio improved to 87.3% from 88.3% the previous year and 92.2% in 2015/16, the annual General Insurance Industry Review shows.

Investment income allocated to insurance funds was $1.2 billion, down from $1.3 billion on depressed interest rates and a conservative allocation approach, with some insurers looking to diversify portfolios.

The insurance margin improved to 16.2% after falling as low as 11.3% three years earlier, continuing the recovery trend as companies focus on costs and improvement programs.

The KPMG report also highlights 10 trends with implications for the local industry.

The first five, related to technology, are digital opportunities, insurtech, blockchain, artificial intelligence and robotics, and the Internet of Things.

The others are climate change, issues in directors’ and officers’ cover, new global accounting standard IFRS 17, Hayne royal commission outcomes, and the use of outsourcing and managed services.

See ANALYSIS.