The Australian insurance industry has nearly $13 billion of excess capacity, says Zurich Australia CEO Daniel Fogarty, and it’s “a big issue” for the market.

The figure features in a new report from Morgan Stanley Research, which says excess capacity is at its highest since late in 2010.

Mr Fogarty says offshore capital is coming direct from insurers such as Zurich and also from underwriting agencies.

Investors seeking risky returns are turning to the insurance market, he told last week’s Australian Professional Indemnity Group conference in Sydney.

Local underwriters have told him that while it has been hard to raise capital in recent years, this year they went to market in London in May and June and “had people falling over them to give them capital”.

“So there are waves of capital coming in through underwriting agencies,” he said. “I would say we have a perfect storm of competition here.”

Factors include the availability of offshore capital, local insurers being well capitalised and brokers “very much competing against each other”, creating downward pressure on prices.

Mr Fogarty says Australian brokers have been talking about how the price of broking fees has fallen, and are making commitments about what premium customers will pay, which is putting pressure on insurers.

Low interest rates are adding to the pressure, with returns falling from about 5.5% in 2010 to 3.5% now. “It’s a challenging place to be,” he said.

Meanwhile, companies are facing an unprecedented number of class actions.

Australia is now the world’s second-largest market for class actions outside the US, with litigation funding prevalent.