Large increases in commercial and domestic property premiums are the major features of an otherwise stable insurance market outlook, according to the latest premium data.

Survey data from JP Morgan and Deloitte says despite rising reinsurance treaties, falling investment returns and the worst losses on record, fierce competition kept insurers from passing across-the-board premium hikes in the 12 months to June 2011.

Pricing pressures affected only the most risk-sensitive lines such as fire and industrial special risks (ISR), householders and NSW CTP.

The companies’ annual report on the general insurance industry says price movements in other commercial lines revealed a two-speed premium economy, where premiums for directors’ and officers’, professional indemnity and workers’ compensation in Tasmania, the NT and ACT were mostly flat while public and product liability and WA workers’ compensation premiums actually fell.

Commercial premiums were on average only 3% higher than FY2010, and only commercial property (up 7%) and commercial motor (up 4%) displayed large gains.

The insurance industry’s inability to pass on higher premiums came despite a fall in overall profitability. Combined ratios surged 11% percentage points since the previous survey to reach 106%, although this was almost entirely a result of combined ratios in fire and ISR climbing to 134%.

Deloitte Insurance Leader Stuart Alexander says the industry is confident of restoring profitability, with insurance premiums expected to rise in commercial lines by 5% and 6% respectively over the next two years.

“Looking forward, the industry anticipates the overall combined ratio will improve very strongly to 89% in 2012,” Mr Alexander said.

“Survey participants expect the commercial lines combined ratios to sharply rebound by 11%, largely through normalising catastrophe costs and reduction in overall expense ratios which crept out in the 2011 results.”

While insurers had no choice but to lift premiums, industry forecasts were typically “optimistic” based on previous years, JP Morgan Senior Insurance Analyst Siddharth Parameswaran says.

“Increases are needed from what we have seen over the past few years,” he said.

“Insurers haven’t made a reasonable return on capital on some of these lines for many years.”

While industry respondents predicted combined ratios would improve in most lines next year, JP Morgan and Deloitte beg to differ. Of the 11 commercial and domestic lines measured in the survey, insurers have forecast seven will improve in 2012, while the report say profitability will either stabilise or fall.

“We call it a theoretical sanity check,” Mr Parameswaran said.

Reinsurance rates have also taken a greater chunk from insurers as they seek to minimise exposure to natural catastrophe claims. Commercial property reinsurance rates have risen by 31% since June 2011, while all other lines were relatively stable. Domestic reinsurance rates were up a staggering 21% on average, led by leaps in domestic motor and property, up 22% and 31% respectively.

While more cash has been spent on reinsurance, less has returned from investment portfolios. Risk-free yields fell by 1.7% in the past six months – a worry for insurers looking to bank easy returns on long-tail lines.

Even with rising prices, clients are still getting a great deal on most premiums. Based on JP Morgan/Deloitte data, commercial lines are still cheaper than they were in 2006, and premiums on commercial property are only 1.12% more than the average paid five years ago.

Relatively cheap rates in commercial classes contrast sharply with domestic lines, where the average premium is 26% higher than it was in 2006.

Staff and climate change again dominated the priorities of industry captains. Regulatory changes and staffing issues were the two most common problems facing insurers, while half of the brokers surveyed felt climate change and distribution channels were the most pressing issues.