Australian insurers are set for more pain in the coming months as earnings continue to take a hit from the virus-linked recession, Fitch Ratings warns in a new report.

The other risk to earnings is the flood-inducing La Nina weather pattern, the ratings agency said. Meteorologists have predicted La Nina will last until at least February.

According to Fitch, top-line pressure in the form of weak premium growth and sluggish investment revenue will constrain earnings. At the same time, insurers are confronted with rising reinsurance costs but passing these on to customers through higher premium rates will be difficult during the present economic slump.

Heavy losses from last summer’s catastrophic bushfire season and other natural disasters worsened the industry’s combined ratio to 100% in the six months to June from 94% in the corresponding period of last year, Fitch says.

Latest figures from the Insurance Council of Australia put insured losses from the 2019-20 natural disaster season at nearly $6 billion, the worst on record as bushfires, storms, hail and floods struck parts of the country.

Fitch’s Associate Director Kanishka de Silva says while the agency does not provide an earnings forecast, its analysis concludes the current state of the economy does not bode well for personal and commercial lines insurers.

“What we are expecting is basically for it to continue to be weak,” Mr de Silva told insuranceNEWS.com.au today. “The economic condition is one of the key factors.

“The reinsurance cost for the non-life insurers has gone up given the recent catastrophe losses. So what they have been doing is trying to reprice their portfolios in order to pass on the higher cost.

“That was the case even last year but given the current weaker economic conditions, we are expecting the repricing to be quite challenging.

“Obviously with the weak economic conditions, the affordability side of things is something you have to look at.”

Fitch says it expects claims from the pandemic to be manageable given the industry’s low exposure as Australian insurers’ portfolios are dominated by home and motor business.

However there is a chance that business interruption (BI) claims may be booked, pending the outcome of a BI test case before the court, Fitch says. The NSW Court of Appeal has adjourned to consider its decision after a hearing on October 2.

On investment income, Fitch says record low interest rates and market volatility will be a drag on returns.