Australia’s general insurers remain profitable despite earnings volatility caused by natural catastrophes and intense competition, according to a new report from AM Best.

Profits have come mostly from investments in bonds and other interest-yielding assets, the ratings agency says.

The insurers’ gross written premium has grown 4.3% at a compound annual rate to $41.7 billion last year from $28.4 billion in 2005.

AM Best expects operations to remain volatile in the short to medium term as intense competitive pressures continue to shape the landscape.

It says insurers remain vulnerable to natural catastrophes.

“Underwriting results net of operating expenses have only been modestly profitable,” AM Best says. “These are partially mitigated by stable investment performance and underwriting results in motor property damage lines.”

The industry’s quarterly combined operating ratio – which includes account management expenses and other operating costs – ranged from 81-132% between 2005 and last year.

Strong risk-based requirements set by the Australian Prudential Regulation Authority (APRA) have played a major role in buffering insurers’ capital bases from volatility.

“These known risks are managed under APRA’s risk-based capital and internal capital adequacy assessment requirements.”

However, AM Best cautions that more oversight may be required if the external investment environment deteriorates.

“Indirect investments, such as unit trusts and managed investment schemes, have increased in proportion,” it says. “This could be a concern if there is less transparency regarding the level of liquidity and the credit quality, especially under untested, stressed conditions.”