Australia’s commercial insurance market has not hardened across the board as expected, and rates seem unlikely to rise soon, according to a new report from mega broker Marsh.

The report says a sustained supply of capital has been keeping insurers competitive despite deteriorating loss records, reduced investment returns and increased reinsurance costs over the past 12 months.

Marsh Senior Placement Executive Roger McCallum says economic recovery and interest rate rises will take the financial pressure off insurers, although he remains cautious of the ever-present potential for a series of market-turning triggers that could dent capacity.

The report notes there is evidence that increases in ratings in the small and medium-sized enterprise and middle-market segments earlier this year have started to flatten out.

“Early in 2009 there was a really concerted effort from the market to move those prices,” Mr McCallum told insuranceNEWS.com.au.

“What normally happens with these things is the brokers reorganise and get more aggressive in their marketing and almost by the natural swing of things start to counter that.”

But there have been notable exceptions to the general trend, such as a spike in trade credit insurance rates and rising professional indemnity premiums for financial institutions, financial planners, funds managers and real estate funds.

There have also been geographical exceptions such as North Queensland, where concentrations of assets have come under ratings scrutiny in light of recent cyclone history, Mr McCallum says.

He says the “turning point” in the more robust and better regulated Australian market is apparently a series of big events – bigger than the global financial crisis and last year’s bad claims activity in Australia.

“I guess those triggering events are becoming things that are of a scale that is difficult to imagine to some degree, but they’ll be there,” he said.

In a section of the report on insurer capital levels, Deutsche Bank says the industry has moved quickly from “starvation” to “comfort” and the gradual shift to “abundance” of risk capital has now begun, although Solvency II requirements and regulatory fine-tuning could erode some excess.

“With limited domestic growth opportunities to absorb surplus capital and return-on-equity targets that are central to CEOs’ operational targets for shareholders, the prospect of capital return initiatives over the next couple of years is, in our view, a real one.”