With the reinsurance market awash in alternative capital, insurance premium rates are expected to fall slightly this year in Australia, according to a new report from actuarial group Taylor Fry.

In the longer term, insurers should expect reduced growth and profits.

“We think the challenge for the insurance market is where to get growth,” Taylor Fry Actuary Sharanjit Paddam told insuranceNEWS.com.au. “Low investment yields are permanent, not short-term. And the large influx of alternative capital is transforming the supply of capital.”

Alternative capital has more than doubled from 5% of total reinsurance capacity in 2007 to 11% last year, and is growing at a much faster rate than traditional reinsurance, Taylor Fry says.

Last year alternative capital hit a record high of $61 billion, up from $19 billion in 2008.

Traditional capital stood at $514 billion in the third quarter of last year, up from $321 billion in 2008.

“Additional capacity has entered the market from both traditional reinsurance and also alternative reinsurance capital, such as catastrophe bonds and collateralised reinsurance,” a new report from the company says.

Mr Paddam says much of the alternative capital comes from US pension funds and is “sticky” – here for the long term.

“They [the funds] have a very long investment horizon and are looking for 20 to 30-year returns. This is not a temporary oversupply of capital; it is a new state of the market.”

Traditional insurers must work harder on service, technical expertise and structuring products, or risk losing market share to niche players.

Mr Paddam says Youi in Queensland has been “very sophisticated” in its customer targeting, underwriting and technology, and there is evidence its loss ratios are lower than others’.

Premium growth rates last year were the lowest in 20 years, with no signs of picking up, the report says. “Home premium growth rates in [2014] fell to 4%, and have resulted in the slowing of premium rates across the industry.”

Car insurance was the biggest industry earner last year, with gross written premium of $7.79 billion, up from $7.42 billion in 2013.

It was followed by home insurance with $7.69 billion, up from $7.31 billion.

In commercial lines, property is the largest class, commanding 12% of the market. Public liability and commercial motor each have 6% and workers’ compensation 5%.

Car and home insurance each make up about 22% of gross premium income in Australia. Compulsory third party accounts for 10%, giving personal lines a combined 53% share of the market.

“We’re clearly at the top of the personal insurance market and well past the peak for commercial insurance,” the report says.

The report says improved road and vehicle safety, building regulations and work health and safety will reduce claims frequency. “Insurers will need to develop new products to meet the changing risks faced by consumers.”