Falling interest rates are pressuring insurance premiums, with CGU CEO Peter Harmer warning liability rates will need to rise at least 8% to offset a steep fall in investment yields.

The fall in investment income has flowed from the 150 basis point reduction in the cash rate since November last year.

Mr Harmer says long-tail business that takes a long time to settle is most vulnerable to falling rates. These lines include general liability, professional indemnity (PI), directors’ and officers’ liability (D&O) and workers’ compensation.

Insurers typically set aside the majority of premiums they receive on long-tail business to pay future claims, but because these reserves are invested in fixed income securities like government and public authority bonds and cash, their value falls with lower interest rates.

“We factor the projected investment income on these claims reserves into our pricing, so a sustained period of falling rates tends to push premiums up,” Mr Harmer said.

He says falling interest rates cause a “multiplying effect on the upfront premium increase we need to charge a customer to offer the same level of cover”.

Jarrod Wilson, CGU’s National Commercial Manager, Professional Risks, says the long-term insurance market has been soft for “quite a lot of years”.

“But it’s still as competitive as it’s ever been,” he told insuranceNEWS.com.au. There’s still a lot of capital in the market.

“Everyone just has to do their job properly and we’ll ride this out over a long period of time.”

CGU sets aside claims reserves for around five years for general liability products, a little over three years for PI and D&O and about two-and-a-half years for underwritten workers’ compensation.