A cursory glance of the daily headlines would have you believe the local insurance industry is on the skids. Not so. While other financial industry pillars crumble, general insurance continues in relatively good health.

With regulators and analysts lining up to commend the strength of the local insurance industry, one must examine the factors behind some of the strugglers of recent times.

Internationally, poor investments and bad business decisions have dragged down the likes of AIG. Locally, it’s an extreme exposure to torrid Queensland weather and bad debt on the banking side that has sent Suncorp cap-in-hand to shareholders in search of $900 million, and it was an ill-timed entry into a foreign market that was a temporary setback for IAG.

Though it is often maligned as a race to the bottom, the business of underwriting is rarely the root of the systemic business failure.

Local insurers are bearing up well, a position reiterated by APRA Executive Member John Trowbridge last week.

‘The Australian general insurance industry has to date negotiated the global financial turbulence without any material adverse impacts,” he said. “This is primarily due to strong levels of capitalisation, a conservative approach to investments and a generally close matching of assets and liabilities to mitigate effects of changes in interest rates on balance sheets.”

Gross premium revenue climbed $1.3 billion to $30.8 billion, and though weather events reduced underwriting results 44% to $2.1 billion, more prudent underwriting performance is expected to drive future performance.

Despite the economic downturn, APRA’s six-monthly General Insurance Bulletin reveals insurers’ resilience. In the year to June 30 2008, as the global downturn began to take hold, insurers’ net income fell moderately by 32% to $3.4 billion. Their capital reserves stayed respectable at 1.91 times the APRA minimum, down on the 2.06 times recorded in the previous reporting period.

Morningstar insurance analyst David Walker believes the local outlook is bright.

“Suncorp has announced that commercial rates are hardening,” he told insuranceNEWS.com.au. “That’s the first confirmation from the companies I cover and it is very significant that it is occurring.”

Mr Walker says the economic downturn should provide an irresistible impetus to higher premium rates.

“It’s an end to the nasty downward cycle in commercial premium rates which was driven by a flood of foreign capital keeping premiums lower,” he said. “It will be interesting to see developments, as the foreign players responsible for pushing local premiums lower may not be able to fund the same amount of growth.”

Mr Walker says insurers may come to be viewed as the cream of Australia’s financial services crop.

“Domestically focused general insurers may outperform banks,” he said. “Insurance is a defensive sector and banks prices are falling heavily.

“Now, while Suncorp’s share price will reflect its discount on capital, IAG stock is going sideways, and that’s better than a lot of other financial stocks, including banks.”

QBE it seems, is especially well fortified.

“It has a pretty simple philosophy of salting away money in the good times for the bad times,” Mr Walker said. “They could take a huge hit and not suffer a major fall in profitability – they are that well reserved.”

He agrees QBE could use that muscle to keep premiums down, but says its move to increase rates in December makes that a doubtful prognosis.

The JP Morgan Deloitte General Insurance Industry Survey backs his viewpoint.

“Given the financial world and real world impacts, we believe that general insurance companies are in a much better position than other financial entities,” it said. “They face much less credit risk and no liquidity risk.”

JP Morgan and Deloitte analysts expect prudent underwriting to lead the way, with the industry combined ratio predicted to worsen two percentage points to 96% during this year before higher premiums restore profitability and a 93% ratio in 2010.

Mr Walker believes personal lines cross-currents present a mixed outlook for insurers of domestic property.

“Cash constraints may prevent the purchase of insurance policies, because people might decide they can’t afford it,” he said. “But it may also promote insurance as people realise they can’t afford to replace expensive assets.”

Factors that could dampen the improved outlook include an increase in crime and an increase in catastrophic weather.

“Insurance fraud tends to occur when people are forced to undertake a desperate search for money,” Mr Walker said.

And as Suncorp will attest, insurers are at the mercy of the elements.

“Weather events are a major driver of fortunes,” he said. “It’s a harsh country for weather and storms keep hitting the population. Climate change is not going to make it any easier for domestic insurers.”

True. But flexible thinking and prompt action by the underwriters can keep insurers buoyant.