Rising claims and falling investment returns have taken a chunk out of the insurance industry's profitability, the Australian Prudential Regulatory Authority's (APRA) half-yearly report reveals.

A 22% fall in investment returns and a 13% hike in claims costs sliced nearly $700 million in profits from the general insurance industry in the 12 months to June 30 last year.

APRA reports the industry banked $4.99 billion in net profit over the 2006/07 financial year on gross written premiums of $28 billion.

Insurers paid gross claims of $20 billion over the 12-month period.

Outstanding claims provision and premium liabilities - funds insurers keep aside for past, current and future claims - rose by nearly $3 billion to $45.6 billion.

APRA Executive Member John Trowbridge says the industry is in good health despite declining profits.

"The minor impact on both the underwriting result and after-tax profit is a reflection of the reinsurance arrangements within the industry," he said.