The business environment for insurers will remain tough and profitability subdued, according to the latest Pendulum report from Finity Consulting and Deutsche Bank.

It says the past two financial years produced relatively poor results for the industry and 2016/17 is unlikely to be much different.

“Investment returns are at record lows, which means profitability from underwriting operations is more important than ever – yet it is getting harder to achieve,” Finity Principal Andy Cohen says.

“Top-line growth remains anaemic and is barely keeping with inflation. In personal lines this is due to strong competition attracted by recent high returns on capital, and in commercial lines [it is] a result of surplus capacity both locally and overseas.”

In the personal lines space there is potential for low rate growth, but strong competition is likely to dampen profit.

In the commercial arena there appears to be a “flattening” of rate reductions, but no strong signal that decent increases are on the horizon.

On the investment side, yields are expected to remain low, with returns likely to contribute less to insurance margins and return on equity (ROE) than a few years ago.

Mr Cohen told insuranceNEWS.com.au the contribution to profits from investments has fallen from $5 billion in 2012 to $2 billion, which has reduced insurance margins and ROE by five points over the same period.

Factors that may partly offset the headwinds include softer reinsurance prices and savings from cost-reduction programs.

The report forecasts an industry ROE in the 10-12% range this financial year, up slightly from 9-10% last year. This compares with an average 15% over the past decade.

“We believe the industry is now in a period of subdued profitability, at least compared with the highs of 2012/13 and 2013/14,” the report says.

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