Australian general insurers will find it difficult to generate growth as premium income continues to be pressured by stiff competition and investment yields remain depressed, Morgan Stanley says.

The growth of digitalisation and the so-called sharing economy are other challenges insurers must look to overcome.

“Insurers continue to navigate tough markets,” the US-based investment bank says in a new report. “With capital plentiful, competition is hurting premium rates, making growth challenging.

“Pockets of claims inflation are emerging, investment yields remain under pressure and tailwinds from reserve releases are likely to have peaked. Meanwhile, the digital world and shared economy present challenges to personal lines revenue pool growth and operating models [in the] medium term.”

Of the three insurers covered in the report, QBE is regarded as the preferred stock, because the insurer has “the most short to medium-term upside and earnings growth”.

IAG ranks second, with “the best earnings stability and transparency, albeit with no earnings growth”, followed by Suncorp, which is confronted with franchise risks and diminishing special dividends.

“With [Suncorp] chasing its tail to rebuild margins, franchise risks remain elevated,” Morgan Stanley says. “Lifting premiums to counter net earned headwinds and rebuild margins hurt volumes, yet the personal lines operating model demands volume to extract scale benefits.”

Morgan Stanley estimates Suncorp’s general insurance operation will make a net profit of $608 million in the year to June 30, down from $756 million the previous year.

QBE is expected to record a net profit of $US113 million ($160.5 million) for the second half of last year, taking its full-year net income to $US601 million ($853.7 million). That is expected to rise to $US867 million ($1.23 billion) this year.

IAG’s net profit is forecast to improve to $870 million in the year to June 30 from $728 million the previous year.