S&P Global Ratings says in a new report it expects Australian insurers will be able to “meaningfully” raise premiums but cautions the industry will have to be mindful of the economy-wide cost pressures that are also straining consumers.

“Australian insurers face a balancing act in 2023. They are increasing premium rates to offset the rising cost of claims,” the S&P report says.

“However, this risks making policies less affordable at a time when the cost of living is rising, which could dampen new business growth.

“At the same time, cost of catastrophes appears to be increasing. But insurers are equipped to handle this confluence of challenges, in our view.”

The rating agency says the high-cost environment is likely to be prolonged, particularly in relation to claims inflation after the record floods last year and other natural catastrophes.

It expects the industry will “continue to manage their exposure to risk by meaningfully increasing the cost of their premiums and re-evaluating their reinsurance arrangements”.

It says the underlying profitability of property and casualty (P&C) insurers will likely strengthen this year as strong premium rate increases will support earnings.

“While the reinsurance market will absorb most of the major claims, insurers will in turn face the rising cost of reinsurance,” S&P says.

“What will continue to stabilise the credit of P&C insurers is their strong capital adequacy, based on our measurement.”