Increased competition, abundant capacity and premium rates falling to levels not seen since before the global financial crisis are among issues facing Australian insurers this year, according to Aon.

In its first-half Insurance Market Update, MD and Chief Broking Officer James Baum says Aon expects a flattening in pricing, then “some marginal correction” in the second half.

Suncorp, IAG, QBE and Allianz have all seen earnings come under strain over the past year following bad weather, especially in north Queensland and Sydney, the report says.

“In property we are already seeing some early signs that insurers are now looking to draw a line in the sand, with rates continuing to reduce but at a significantly slower rate,” Mr Baum said.

Mergers and acquisitions are continuing, but they are about building scale rather than “to benefit from synergies and cost reductions”.

“With greater scale there is a bigger balance sheet and the ability to take on larger bets,” Mr Baum said.

This will result in insurers generating more capacity than ever.

A swing back to focus on synergies and cost savings may be required to make acquisitions work as insurers try to balance their needs for return on investment against retaining premium.

The continued oversupply of capacity in property led local rates to reduce 6.35% last year, compared with 3% globally, the report says.

COO Aon Broking Ben Rolfe says while January saw continued reductions in treaty reinsurance premiums for insurers, “the continued lack of profitability will likely drive the need for many insurers to correct their books, or at the very least stop the premium erosion”.

“We certainly don’t see any major swings in pricing coming any time soon, but the outlook is a far more stable one over the next 12 to 24 months.”