S&P Global Ratings has released its mid-year insurance outlook for Australia and the broader Asia-Pacific region.

The rating agency says it expects the Australian property and casualty (P&C) sector’s combined ratio to revert towards the “low 90s” following material compound premium rate rises in the past couple of years.

Despite the upbeat outlook the industry still faces challenges including claims inflation, rising reinsurance costs and extreme weather events.

“For markets like Australia and New Zealand claims inflation could still weigh on insurers’ underwriting results,” Director and Lead Analyst Insurance Ratings Wenwen Chen said in a webinar.

“And as economic growth slows it could also undermine business and consumer confidence as we have already observed in some markets… this could also weigh on premium growth.”

The rating agency’s Melbourne-based Director and Lead Analyst, Craig Bennett, says he expects the industry’s underwriting performance to hold up despite the challenges, based on the latest Australian Prudential Regulation Authority (APRA) update.

The APRA update shows the industry made an underwriting profit of $5.3 billion in the year to March, up 12.4% from a year earlier. Gross earned premium rose 9.4% to $64.4 billion with almost all classes of business recording premium increases.

“I think it’s going to be pretty good,” Mr Bennett told insuranceNEWS.com.au, referring to his outlook for the industry’s earnings prospects.

“They are getting the earn-through from the price increases. The biggest caveat is we don’t know to what extent there will be further cat events but it’s been a pretty good year.”

He says insurers have raised headline premiums by between 6% and 12% in response to rising costs including reinsurance.

“It is a dynamic that we are continuing to see in terms of rising premiums to cover higher expenses and claims but we do see this moderating going forward,” he said.

“So the rate of increase in premiums will likely slow and similarly there should be some moderation in the cost of meeting those claims.”

Overall for the Asia Pacific P&C sector S&P says changing risk appetite among global reinsurers could reduce aggregate reinsurance capacity. “This could weigh on [P&C] insurers’ profit margins.”