Australian general insurers are continuing to face significant challenges over the next year, but Standard & Poor’s, at least, is positive about the outlook.

The ratings agency said last week that the insurers have responded strongly following the reduction in capacity, reinsurance premium rate increases and investment volatility. Despite premium rate increases and strengthened reserving to support financial strength, the market remains highly competitive, with more than six material group participants seeking growth and improved returns.

Michael Vine, S&P’s Director of Financial Services Ratings, said competition, exposure to significant long-tail risk including liability insurance, and heightened volatility affecting domestic and offshore investment markets will see many insurance companies continuing to face significant challenges into 2003, and some shareholders questioning their long-term commitment to the market.

“Policyholders increasingly are questioning the strength and reliability of their insurers,” he said. “For their part, insurance providers must contend with the cyclicality of the local environment and global reinsurance markets, and adjust their policies and product offerings accordingly.”

S&P’s maintains a “stable” outlook for the financial strength of the local market, Mr Vine said. Improved risk-management practices, including reserving processes, have been a particular focus of companies more recently.

“Furthermore, the market’s core underwriting performance should be supported by the significant premium rate hardening and tighter underwriting controls. The currently volatile state of investment markets is of particular concern to insurers with larger exposures to equities, although companies are increasingly active in reducing exposure and volatility.