Commercial premium rises are providing the main tailwind for the insurance industry, which achieved a bounce-back performance last financial year, Finity Consulting says.

But it warns significant multi-year rate rises are needed to bring commercial short-tail classes back into the black, while growth in personal lines is expected to become increasingly difficult.

The insurance margin gained two percentage points to 16% last financial year, and return on equity (ROE) reached 15% for the first time since 2014, assisted by premium rises, a low level of catastrophes and reserve releases.

“In private motor, which accounts for one-quarter of industry net premium, insurers seem to have put the brakes on the strong claims inflation seen in recent years,” Finity Principal Andy Cohen says.

“Coupled with the rate increases achieved, this class has almost returned to target profitability.”

Finity’s annual Optima report says recent rate increases in personal and commercial classes will flow through this year, and there is room for more premium hardening.

But overall industry premium rises are likely to be curbed by low economic growth and low inflation, affordability issues, competitive pressures and the relative lack of domestic growth opportunities.

Finity expects profitability will remain sound, although a little below target.

Reported profitability is expected to contract slightly but remain in double digits this year, while margins and ROE are expected to stay in the 10-15% range for the next three years.

“Although the outlook for overall industry profitability is good, headwinds to watch out for are numerous,” Mr Cohen said.

These include reduced scope for reserve releases, Hayne royal commission regulatory impacts, stronger claims inflation and class actions. Investment returns also remain very low.

See ANALYSIS.