Australian general insurers are generally well insulated from the financial turmoil engulfing the US economy, according to the Reserve Bank of Australia (RBA).

Its latest report into Australia’s financial stability, released just a week after the AIG bailout, suggests local regulation and a strong onshore asset base are helping to keep the industry on the right side of the ledger.

Insurers remain profitable despite the tough times, though returns are not as great as they were a few years ago, with the industry recording an aggregate 15% return on equity last financial year.

It notes that investment returns were down around 25%, a reflection of weakening markets globally. But Australian insurers with typically “conservative” investments are comparatively well placed.

“Consistent with this, Australia’s largest general insurers have not reported any direct exposure to US subprime risk through their investment portfolios,” the RBA said.

It noted declining underwriting profits – particularly among commercial lines – with claims (up 17%) rising much faster than premium rates (up 2%). The aggregate combined ratio has therefore blown out to 92% – an increase of eight percentage points.

But the RBA maintains that Australian insurers operate from a “sound” capital position.

“Negative sentiment arising from the difficulties at the US insurer AIG has not had a significant impact on the local market,” the report said.

“The Australian financial system has coped better with the recent turmoil than many other financial systems.”