Insurers should put the same effort into maintaining customer trust as they do protecting financial capital, the Australian Prudential Regulation Authority (APRA) says.

“The potential for erosion of trust is a threat that must be dealt with,” APRA Executive Member Geoff Summerhayes told the Australian and New Zealand Institute of Insurance and Finance’s annual Reinsurance Rendezvous conference in Canberra last week.

“The industry should be more proactive in responding to this while also being vigilant over other challenges facing the sector.”

Mr Summerhayes says the general insurance industry is in good shape from a capital and profitability perspective.

“I propose to you, though, that such solidity can be compromised if community trust is broken. I repeat my message to the life insurance industry not long ago: ultimately, capital will not help if your customers don’t trust you.”

Breaches of trust are most likely at point of sale and claims time, particularly given insurance law and product disclosure document complexities, combined with consumer financial literacy issues, he says.

Mr Summerhayes says APRA is keeping a close eye on commercial property insurance, with an intensely competitive environment raising questions over the way insurers manage risk.

“APRA is monitoring closely… claims trends and loss ratios and, while we are comfortable to leave any necessary corrections to industry for now, we will adjust our supervisory intensity in this area in response to worsening trends,” he said.

The claims experiences of insurers with large compulsory third party exposures are also gaining close scrutiny amid challenges in the market, particularly in NSW.

And Mr Summerhayes warns insurers against pursuing “sub-grade” investments in the search for higher yields as low interest rates persist.

“To date, we’ve only seen small movements in this area. While our capital rules capture higher-risk investments, insurers need to take care not to adjust their investment portfolios outside of their risk appetite and without due consideration to the risk-return trade-off.”

APRA is extending its stress testing to a selection of general insurers and says results are due this month, with outcomes to be released early next year.