Insurance industry gross written premium growth slowed to a decade-low 3% last financial year amid tougher conditions, as rising claim costs and a widening divide between personal and commercial lines shape the outlook, Finity’s Optima report says.

Return on equity fell 7 percentage points to 12% due to lower investment returns, higher natural perils losses and lower reserve releases, plus higher underlying loss ratios for householders and commercial lines.

The profitability measure is forecast to ease to 11% in the current period, with a drag from soft commercial lines partly offset by higher investment returns.

The Optima report, now in its 20th year, says the net combined operating ratio is expected to deteriorate further to 98% after worsening by 2 percentage points to 95% last year.

Finity principal and Optima lead convenor Pravesh Ponna says overall outcomes mask increasingly divergent conditions across classes as the industry moves into a different phase of the cycle.

“Premium growth is slowing as competition intensifies, but claims costs remain a challenge,” he said.

“While the industry remains profitable overall, the outlook is increasingly uneven, particularly for commercial insurers facing continued pressure on rates and margins.” 

Overall premium growth of 5% is expected this year, reflecting volume gains of 2% and with sums insured and rate increases providing a 3% boost.

Commercial lines GWP fell 1% last year, the first contraction in a decade, with property, financial lines and standalone liability experiencing rate reductions.

SME business packages and commercial motor grew 4%-7%, with the pace of gains slowing despite claims inflation.

Finity sees commercial GWP growing 1% this financial year as workers’ compensation, business packages and commercial motor respond to claims cost pressures.

Personal lines GWP is forecast to increase 7% after rising 6% last year, with householders to increase 11% as affordability concerns and claims inflation remain issues.

Forecasts assume property natural peril losses will be comparable to last year, but a potentially record-strength El Nino is adding uncertainty. Geopolitical developments and repercussions for insurance and investment markets will also influence industry outcomes.

“Given the competitive pressures, ongoing claims inflation, and the impact of the climate and geopolitical environment, it will be critical for insurers to quickly identify and respond to emerging market conditions through pricing, underwriting and claims management,” Mr Ponna said.