Moody’s Investors Service warns cyclical headwinds will pose a challenge for the Australian property and casualty sector this year.

The ratings agency says insurers have relatively strong balance sheets, having recovered from heavy 2011 catastrophe losses.

It expects the recent Brisbane storms to have a modest impact on profitability.

“We’ve seen profitability steadily recovering,” VP Frank Mirenzi said. “But we note that slowing premium growth, rising competition for motor and home insurance clients and low interest rates will challenge the industry.

“Recent data and industry surveys suggest premium rates are softening as smaller competitors offer significant premium discounts to win business.”

Moody’s says rising exposure to higher-risk assets may also hit profitability.

Payments from reinsurers have cut the gross claims paid by general insurers since 2008, it says.

“Falling reinsurance premium rates also provide more pricing flexibility for primary insurers, allowing them to pass on cost savings to consumers.

“These positives are reflected in the industry’s combined operating ratio, currently at a historical low, in addition to the industry’s relatively homogenous motor and home insurance products, which support appropriate pricing and management of underwriting risks.”