Australian Insurers Cautioned on Raising Rates Despite Stable Market: Lifebroker

May 18, 2012 - According to Lifebroker a report issued on 16 April 2012, rating agency Standard & Poor's (S&P) has maintained its rating of "stable" on the general insurance sector in Australia, but cautions insurers about the viability of increasing insurance premiums to offset recent losses.

The report, "Asia-Pacific Non-Life Insurance Outlook: Tighter Risk Controls Are Crucial As The Markets Continue To Grow," focused on the deterioration of Asian markets outside Australia, but found sufficient strength in the Australian market to maintain its existing rating. S&P attributed the stability to strong levels of capital and "resilient underlying operating performance," bolstered by the protection of widespread reinsurance.

The report predicted that attempts to raise rates further would be a challenge for insurers, singling out "customer affordability" as the greatest hurdle, even though "retention levels have remained fairly steady."

At the same time, the agency sees increased prices, along with improved operating efficiencies and a decrease in costs for catastrophic losses, as the path to improved insurer margins in the wake of recent losses. Customer resistance, however, will present a challenge. "In response to such challenges, insurers are working to alleviate pricing pressures by improving their operating efficiencies by streamlining their business operations, systems and supply chains," according to the report.

The possibility of natural disasters remains a concern, as does volatility in the market for fixed interest instruments.

According to S&P credit analyst Paul Clarkson, none of the 12 Asia-Pacific non-life markets covered by the agency merit positive ratings."The pace of economic growth in the region is slowing and volatility in the investment markets have increased over the past few years," he said, adding that fundamentals warranted stable outlooks for most markets.

The exceptions are India and Thailand, both of which received negative ratings "given their poor underwriting losses due to underpricing and flood losses, respectively," according to the report. Both Japan and New Zealand, markets that recently had negative outlooks, were considered stable. For New Zealand, the report noted that the improved rating "reflects the stabilisation of insurers' financial profiles since the massive earthquakes in Christchurch in 2011."

Both China and Malaysia were downgraded, moving to "stable" from "positive." In the case of China, this change reflects S&P's general concern with the state of the economy, while also focusing on regulatory changes in the Chinese market. Premiums for insuring motor vehicles are scheduled to be deregulated this year, and insurers will no longer be able to recover costs from claims managers before paying motor vehicle claims to third parties.

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