The challenges facing Australia’s general insurers are stacking up – but it’s nothing they can’t handle, according to Standard & Poor’s (S&P).

In a new report the ratings agency continues to assess the industry and country risk for the sector as “low”.

This is despite a range of obstacles, not least a soft market that S&P does not expect to turn around any time soon.

“Over the past 2-3 years, premium rates have been softening in Australia across most retail and commercial insurance classes, which we attribute to greater capital availability in a low, global, interest rate environment,” the report says.

“Any improving trend is likely to be triggered by higher natural peril costs or funding constraints as global interest rates edge up over time.”

Competition is intense, with challenger brands investing aggressively in marketing campaigns and growing strongly. Those with strong parents are often prepared to sustain multi-year losses to gain a foothold.

S&P estimates the challenger brand share of retail insurance premium is 8-9% in the eastern states and 3-4% in SA and WA.

Major banks have also grown in personal lines, using the strength of their brands, leading to an estimated market share of 7-10%.

Consumers “expect more from insurers” and are willing to shop around and switch, the report says. This is encouraged by “increasingly pervasive price-based promotions” and consumer access to online information.

“A softening pricing cycle is bringing earnings under pressure, and it is compounded by low investment yields,” S&P analyst Caroline Strahan told insuranceNEWS.com.au.

“There is limited chance to raise rates due to challenger brands, which are competing for business, and reinsurers are also trying to move up the value chain into insurance, in response to the challenges in their sector.”

However, insurers have weathered the storm, and S&P views the sector’s prospective profitability as positive relative to peer markets.

Larger companies have stabilised retention levels through targeted rate discounts, funded by cost-saving initiatives, and the strength of their brands.

“Insurers’ earnings have been supported over at least several years by steady growth, solid underwriting profits and stable investment returns,” the report says.

“The sector’s historical underwriting profits have been driven by tighter pricing and underwriting controls, a fairly benign economic and inflationary environment in Australia, some periods of favourable weather and cost-saving initiatives.”

Insurers are also benefitting from lower reinsurance costs, due to the current surplus in reinsurance capacity.

And they have been spared the added complication of aggregator websites, which have generated intense price competition in the UK but gained little traction here. Larger insurers noted the focus on price at the expense of policy conditions overseas, and have chosen not to participate.

“The direct market in Australia is fairly well serviced, and customers appear to have no material issues with the product offering,” the report says. “They are able to obtain and compare their own quotes directly from insurers.”

The general insurance market is highly developed and mature, so penetration is unlikely to increase.

However, the privatisation of government compensation schemes may provide a new source of premium.

The report notes Australia’s very low economic and political system risk, low financial system risk and strong rule of law. The country continues to provide a stable environment for insurers, limiting the potential for adverse affects from significant downturns.

“There are a number of challenges but we should be wary of overplaying them,” S&P analyst Mark Legge told insuranceNEWS.com.au. “The sector is in a good spot.”