US ratings agency Fitch says the current hard market in Australia will continue until late 2004, slightly longer than that predicted for the US and key European markets. In its semi-annual review of the Australian insurance industry, Fitch said the local industry is now characterised by massive rate increases, a reduction in reinsurance market capacity and poor but improving combined ratios and underwriting results.

Subdued investment market performance, increased regulatory scrutiny, low public confidence and investor nervousness are other factors making an impact. “While the focus on the industry has been negative, the Australian industry appears to be adequately placed to take advantage of premium rate rises across all portfolios,” the Fitch report said.

With disciplined underwriting and no major domestic catastrophes, the industry should experience lower combined ratios and improved shareholder returns. Fitch said the general insurance industry needs to become more prudent in its underwriting in 2002 if it wants to improve profitability.

“Despite the lure of massive premium rate increases, judicious underwriting must become an entrenched part of an insurer’s operations if underwriting results and shareholder returns are to improve.”

That’s hardly a new message, but the agency has stuck its neck out with its prediction that Australia will face a hard market until 2004. Many analysts see some improvement next year. As Fitch sees it, domestic factors such as last year’s collapse of HIH and its effect on the market; the increased frequency and severity of product and public liability claims; and premium rates being more market-driven than in the highly regulated US market are the major causes for Australia staying higher longer.

Fitch said the length of the hard market also “heavily depends” on when the international reinsurance market begins to soften.