Australia’s property and casualty (P&C) sector will continue to perform strongly in the medium term, according to S&P Global Ratings.

The ratings agency’s insurance industry and country risk assessment for the sector remains low, and it expects the aggregate return on equity to stay above 10%.

“A key supportive factor is the industry’s profitability relative to other P&C insurance markets, supported by rate increases, improved cost management and sound underwriting discipline,” S&P says.

“Adequate reinsurance programs, combined with sound capital adequacy, have also moderated the impact of large claims and catastrophe events.

“We believe the operating performance of Australian P&C insurers will continue to be strong in the medium term, while cost and claims inflation remains moderate and pricing remains rational on the whole.”

The industry has demonstrated its resilience in recent years, churning out profits despite taking hits from several high-severity natural catastrophes such as the Brisbane hailstorm in 2014 and Cyclone Marcia in 2015.

“In our view, Australian insurers have generally maintained robust reinsurance protection with high-quality counterparties, which limits their exposure to losses from extreme events [and] an accumulation of losses from a series of smaller events,” S&P says.

“We expect this practice to continue while reinsurance capacity is relatively high for Australian insurers and available at reasonable cost.”

The soft market is showing signs of a turnaround, with most insurers passing on price rises and maintaining retention since the first quarter of last year.

Various government moves to further privatise state-based underwriting or claims management of non-catastrophic injuries will create opportunities for the sector, the ratings agency says.

The major established players continue to dominate, even as new entrants have made inroads in direct retail lines through price discounting and significant marketing expenditure.

“We assess operational barriers as moderate, reflecting the challenges in competing with large, established players with positive brand differentiation,” S&P says.

“These players benefit from significant economies of scale, extensive data sets on policy and claims experience, national supplier and support networks, [and] negotiating power on reinsurance and procurement agreements. Significant management and operational resources, brand strength and insurance expertise are required to meaningfully penetrate the market.”