The so-called premium wars in the Australian market may be causing instability, according to the local offshoot of one of the world’s most diversified global players.

Although profit statements have painted a rosy picture of the market’s health, Liberty International Underwriters says the industry is not as profitable as it looks, and premium pricing is dangerously low.

Since 2004, when the insurance cycle hit a peak, local and foreign insurers have slashed premiums year on year to gain market share. Brokers are also concerned about the practice, recently reporting a rise in “irrational decreases” in the latest National Insurance Brokers Association market conditions survey.

Liberty Executive Vice President Asia Pacific Noel MacCarthy says “industry chatter” reflects a lack of understanding that could produce a repeat of 1990s instability.

“We’re fast approaching a point where premium prices will become inadequate,” he said in a special briefing last week.

“There is a need to better understand the intricacies that underpin insurance market movements to ensure premiums are assessed in the right context.

“We are seeing increased competition for the same market size, and this is leading to a lack of underwriting discipline as insurers scramble to reach top-line growth targets.”

Mr MacCarthy says international insurers are exacerbating the trend by chasing growth in a shrinking market, and financial statements don’t give a true indication of the industry’s well-being.

“In the insurance industry, a financial year is a reporting structure only,” he said. “A mix of underwriting years and prior-year movements in reserves makes it difficult to track real results.

“At the same time, we need to be mindful that the industry in Australia has a finite market size. That means the growth of one or more insurers will inevitably be at the expense of others.”