A sharp economic downturn and large natural catastrophes are the main risks facing Australian and New Zealand insurers, according to Fitch’s outlook for next year.

Premium income will be hit if economic growth falls below the ratings agency’s projections of 2.7% for Australia and 2.5% for New Zealand.

“Rising unemployment and a deteriorating economic growth outlook would have a number of negative implications for Australian and New Zealand insurers,” Fitch says.

“Related-party banking businesses, if affected, could weaken group credit profiles and reduce surplus capital within the insurance entities.”

Natural catastrophes are a major unknown for the sector, and it is far from certain how the impact of El Nino will play out next year.

NSW storm damage and other weather-linked events have already cost insurers in Australia and New Zealand $2.2 billion this year.

“Larger and more frequent loss events could threaten outlooks,” Fitch says. “Initially this might only affect earnings, but an increase in the frequency of events could potentially reduce available reinsurance capacity, and lead to higher net retentions and exposures.”

Data from the Insurance Council of Australia and modeller Risk Frontiers indicate losses from natural catastrophes averaged $2.5 billion annually from 2007-11, up from the historical average of $1.2 billion.

Fitch is keeping its rating and sector outlooks at stable.

The agency “expects the non-life sector to strengthen earnings [next year], subject to a more benign level of natural catastrophe losses than [this year]. Better underwriting margins should be complemented by improved investment yields, but competition is affecting premium rates.”

Australian and New Zealand insurers have increased their exposure to growth assets or higher-yield fixed-income assets, which will lift investment income.