The Australian Prudential Regulation Authority (APRA) has cautioned against complacency as it outlines risks facing the insurance industry.

Its 2015/16 review of a sample of insurers and reinsurers indicates they have the frameworks in place for oversight and control of pricing decisions amid heightened competition – but there is room to improve.

“Although the general picture is one of a broadly healthy Australian financial system, there remain some areas of vulnerability,” Chairman Wayne Byres says in the annual report.

“These include… poor experience in some segments of the insurance market.

“There is also a need to consider, across the financial sector as a whole, how best to promote a sound risk culture.

“In short, the current environment is one that reinforces the need to avoid complacency.”

Weak growth, low investment yields, challenges with compulsory third party (CTP) cover and a competitive commercial insurance market are among issues facing the industry.

APRA says it is closely monitoring CTP claims data, and a team will examine the NSW scheme for adverse trends that could spread to other long-tail classes.

“Insurers face the persistent risk of inadequate reserving for insurance liabilities, which can expose them to potentially significant losses if their claims outlook deteriorates in later years,” APRA says.

“Claims data has been collected from CTP insurers to monitor trends in frequency and severity… This exercise has also provided insights for APRA’s assessment of the management and controls in place at these insurers to monitor and manage the impact of this risk on their CTP reserves.”

Commercial lines are dogged by pricing competition, especially for large corporate property risks in the fire and industrial special risks class.

“In such an environment the risk to insurers is that the desire to maintain existing customers and market share, as well as win new business, results in inadequate pricing that exposes them to material losses in the future,” APRA says.