Insurance profits are tipped to suffer in the next few years because the good times can’t last.

The JP Morgan and Deloitte 2004 General Insurance Industry Survey for the year to June 30 shows that rising premium rates, tighter policy wording and a favourable claims environment have created “a highly advantageous” environment.

But letting the good times roll is not enough – profitability needs improved conditions.

JP Morgan Senior Insurance Analyst Shane Fitzgerald says insurers “will still be generating healthy returns on capital (but) it will nevertheless result in flat – if not negative – earnings momentum”.

The first sign of the profit slowdown will show up in revenue, Mr Fitzgerald says. The top three personal lines insurers have revenue growth targets that are above system growth rates. “Clearly not everyone will be able to achieve their targets.”

Colin Brigstock, the lead partner at Deloitte’s Insurance Industry Group and Managing Partner of Trowbridge Deloitte, agrees that conditions with “all the planets in alignment” cannot continue in the medium to longer term.

The survey shows commercial rates down by an average of 4% for the year. They are forecast to fall another 4% next year and 2% in 2006. Brokers expect a 5% average drop in rates but underwriters say about 3% is more plausible.

For the first time in the survey’s history industry participants expect the combined ratio to fall next year across most classes. “The combined ratio is forecast to deteriorate by 1.7% from 89.8%, which is still clearly a very attractive combined ratio.”

Brokers say rates dropped by an average of 7% over the year. The underwriters say it was only 1%.