General insurance price comparison platforms and their impact on insurers’ profitability has come under scrutiny by the Australian Prudential Regulation Authority (APRA).

Writing in APRA’s 2011 annual report, the regulator says UK experience has shown the success of so-called comparators has been linked to falling underwriter profits in soft market conditions.

“By its very nature, insurance pricing involves an element of uncertainty,” the report says. “Hence, the premium for identical risks will vary across insurers depending on the assumptions that underpin their pricing process.

“Aggregators highlight to customers the insurer offering the lowest premium for their particular risk characteristics.

“As a result, insurers tend to only ‘win’ business in the segments in which they are the cheapest, and customers are likely to switch insurers more frequently.”

APRA notes this makes it harder for insurers to underwrite a profitable portfolio of risks.

Despite the threat from these platforms, APRA Chairman John Laker says the Australian insurance industry has survived the spate of natural catastrophes earlier this year and is in good shape.

“Despite the adverse impact of the natural disasters, the general insurance industry remained profitable and well capitalised,” he says in the annual report.

Dr Laker praises general insurers’ resilience and prudent risk management on the part of boards and management, “particularly in maintaining and renewing comprehensive reinsurance programs to spread catastrophe risks”.

“It also reflects the robust risk-based capital regime introduced some years previously by APRA.”

The report notes general insurers’ capital ratios fell during the last financial year due to increases in required capital for higher reinsurance recoveries and insurance contraction risk.

“It was nonetheless about 1.75 times APRA’s minimum capital requirements – a strong position.”

But despite insurers’ ability to weather the disasters, APRA did set up a team to look at those directly affected by the events.

“Some smaller insurers, where the relative claims cost was larger, secured additional capital from their foreign parents to cover future claims,” the report says.

“Broader issues identified by this review process were the varying quality of the reinsurance arrangements statements provided to APRA and the need for more robust stress-testing.”

The regulator says it is talking to insurers about these issues.