One of Australia's largest insurers says falling interest rates will push up insurance premiums.
Insurance companies have already faced a tough few years as natural disaster payouts cut their revenue, and have put up insurance premiums as a result.
CGU's chief executive Peter Harmer says falling interest rates have also cost insurers a lot of investment income.
"When interest rates fall, obviously investment returns reduce and, therefore, the original premium to the client needs to go up," he said.
CGU is a big commercial insurer and the largest insurer of regional and rural communities in Australia.
Mr Harmer says falling interest rates are putting pressure on investment returns and that will lead to higher insurance premiums.
"For example, the fall in the cash rate since November 2011 of 150 basis points would have required a rise in liability insurance premiums of some 8 per cent to offset the reduction in the investment return," he said.
Mr Harmer says it is not just another excuse for increasing profit by raising insurance premiums.
"We need to be financially sound, all insurers need to have economically rational pricing regimes," he said.
"We're very conscious of the fact that many of our customers have experienced rising insurance premiums and there is a real issue around affordability, which means of course you know we've put a lot of focus in other ways in which we can reduce expenses and constrain the amount of premium increases that need to be passed on to customers." 'Reasonable argument' Independent insurance analyst David Walker agrees it is not just a ploy by insurers to put up premiums.
"Is it a reasonable argument, there are two sources of profit here - investment returns and high premiums," he observed.
"When investment returns are low, as they are now, there's more pressure on insurers to raise premiums to increase profits from that source.
"When investment returns are high...
there's less of a need to find profits from high premiums, so to some extent they do offset each other and I think the argument CGU was making today is reasonable." David Walker says customers can expect to see fairly significant insurance premium increases, particularly if interest rates fall further.
"I'd say mid-to-high single digits.
Double digits in one single year would be a lot to see," he said.
"Where claims are trending a bit above forecast in one particular line, they might take this opportunity to implement an above average rate rise there, but I would think several percentage points above inflation is what they'll be looking for." Mr Walker says insurance companies are probably justified in putting through hefty premium increases next year, but the out-sized increases should be a one-off.
"They might be taking the opportunity to increase margins a little bit there.
It is a fair bit for one year, I'd be surprised if they did it again next year, but a 150 basis point reduction in the cash rate is a lot, and that has flowed on to the other yielding securities along the yield curve," he said.
"The Australian yield curve is quite negative, it's pricing in a significant economic slowdown, so rates of return on fixed interest securities in which longer tail insurers like CG are investing are very low.
This explains the fairly high increase in liability insurance rates."