General insurers have been warned about investment risks amid persisting low interest rates, according to the Australian Prudential Regulation Authority (APRA).

The industry’s investment income was down last financial year because of low returns on fixed-income products.

The investment environment presents a challenge to boards and management, APRA says in its annual report.

“Their responses have been a focus of APRA’s supervision. In APRA’s judgement, strategic ambitions have been measured and realistic and there have been few signs of adventurism or over-confidence that have needed to be reined in.”

Sustained low interest rates will affect most general insurers because of their significant long-tail insurance liabilities, the regulator says. Insurers will have to reprice the business to compensate for low returns.

“The price increases needed in some long-tail business, particularly professional indemnity and public and product liability classes, may be difficult to achieve because of competitive pressures.

“As a consequence, insurers may be led to underwrite new business of poor profitability.”

APRA has warned general insurers against increasing their investment strategy risk appetites.

“A ‘search for yield’ by tilting asset allocations towards lower-grade or alternative investments comes at the cost of assuming higher market, liquidity and credit risk.

“The environment may also tempt some insurers to sustain short-term profitability by inappropriately weakening the reserves held to meet their long-tail insurance liabilities, leaving them exposed to large losses if their claims experience were to deteriorate.”

However, APRA says the general insurance industry is in good shape overall.

“Industry profitability was bolstered by strong underwriting results in the property classes of business, reflecting relatively benign weather conditions and increases in premium rates.

“In contrast to the previous year, these results were not offset by the revaluation of long-tail insurance liabilities due to falls in interest rates, because the falls in rates [last financial year] were smaller.”