As Australian insurers, investors and policyholders grapple with what AIG’s near downfall means to them, the question of whether it could benefit the local market has now been raised.

Panic surrounded the US insurer as it teetered on the edge of collapse, but it also brought into sharp relief the stability of Australia’s strictly regulated insurers and highlighted the US giant’s recent manoeuvrings in the local market.

Credit Suisse’s new report, Defensive sector in uncertain times, suggests AIG’s “near-death experience” could actually help the local market.

The report, a survey of Australia’s major insurers and brokers on the state of the market in the third quarter, notes that AIG is not a particularly large player in Australia, “but was singled out by the larger local insurers and brokers as being particularly aggressive in the recent key June renewal season”.

“A more subdued AIG in Australia may continue to assist the turning of the market locally, which we believe is already happening in short-tail classes.”

On the turning of the market, the report shows insurance rates on personal lines are on the increase. Compulsory third party premiums in Queensland, for example, increased at the end of the third quarter by about 5%.

Still, Credit Suisse says more rate increases are needed “to fully restore profitability, in particular in Queensland, where superimposed claims inflation has reared its head recently”.

Motor rates are also on the increase. The survey shows they were up 3.3% over the quarter, with some insurers implementing double-digit rate increases, up to 12%.

But commercial lines rates are seen as a concern for Credit Suisse, with rates steadily declining since 2004.

IAG, Suncorp and Austbrokers say the larger corporate segment continues to be competitive. Yet they are seeing some market turnaround, particularly in the SME markets and short-tail commercial motor.

Credit Suisse analyst Arjan van Veen told insuranceNEWS.com.au the problem is that commercial lines remains a global business at the large corporate end of the market, which means local rates are driven by the global pricing cycle.

He warns investors that while QBE appears to be trading above its global peers, it is not immune to global rate weakening.

“QBE’s only issue is that in the longer term, as a commercial insurer, it could be affected if global pricing is weak,” he said.

But Mr van Veen says there are still expectations that QBE, which has historically grown through acquisitions, might avoid global rate weakening if it is able to purchase cheap assets in the future.

Overall, the Australian property and casualty sector is much better placed than overseas markets, with local profitability above its global equivalents yet not overly expensive relative to Australian financials. It also has significant defensive qualities.

Credit Suisse is still wary that the sector could present a value trap for investors if insurers’ reserve releases run out and premium rates in commercial lines reduce before the impact of rising rates can be felt.

So the market remains a tricky place to play speculative games. As insuranceNEWS.com.au reported last week, the Reserve Bank’s latest report on the insurance sector shows Australian insurers currently are in good health and are unlikely to follow AIG to the brink of financial collapse.

But to remain healthy, rates need to increase. And despite the call last week by Munich Re for double-digit rises, there’s still plenty of competition in the global market and the capital to sustain it. No one wants a sharp rise in rates, but that may be what eventually happens.