Australian Insurance premiuns likely to rise as claims increase

Australia's insurers are likely to raise premiums as they seek to offset higher claims costs and as low interest rates cut returns from investments, according business services firm KPMG.

But recent entrants into the local market, including Australia Post as a distributor, could limit those increases to premiums, KPMG's general insurance industry survey for 2009 released on Tuesday shows.

"We can expect to see higher premiums as insurers seek to manage increased claims costs and lower investment returns," KPMG insurance sector leader Brian Greig said.

Australia's total general insurance profit fell slightly to $A3.197 billion (US$2.76 billion) in 2008/09, from $3.210 billion the year before, as return on assets and return on equity both declined, KPMG has calculated.

The impact of extreme weather events, including the Victorian bushfires and Queensland floods, together with the economic downturn had pressured earnings.

In response to those headwinds insurers, including Insurance Australia Group Ltd, Suncorp-Metway Ltd and QBE Insurance Group Ltd, had already been raising premiums in response to the greater risk.

That had resulted in gross written premium from Australia increasing 6.4 per cent to $22.2 billion in 2008/09.

Insurers also needed higher returns from insurance sales because interest rates were at record lows after the huge cuts late last year and in early 2009.

Insurance companies mostly invest their reserve funds - the money they have to cover claims - highly rated fixed interest assets, which now have much lower yields than a year ago.

Mr Grieg said it was too early to say how much effect new entrants would have on the market.

"New distribution channels such as The Buzz, Virgin Money, Australia Post and Coles may provide robust competition in the car and householder sectors," he said.

Australian insurers may also start to benefit from better weather patterns.

The move to a dry El Nino weather pattern, from the wet La Nina pattern of the past few years, means that there are likely to be less claims related to adverse weather.

"There will be less rain, less flooding, less storms and less hail," Mr Grieg said.

Australia's general insurance industry is dominated by QBE, IAG, Suncorp and German giant Allianz.