Standard & Poor’s (S&P) has maintained its stable rating on the Australian general insurance industry, but says insurers’ efforts to increase rates “could be a challenge”.

In a report on the Asia-Pacific non-life market, the ratings agency says the robust capital levels and “resilient underlying operating performance” have resulted in no change to its rating.

It says the strong nature of the Australian market is due to having extensive reinsurance protection in place, despite this being tested by natural disasters.

But S&P warns that insurers’ moves to increase rates to recoup some of the recent losses may fail.

“While retention levels have remained fairly steady, we believe efforts to increase rates still further could be a challenge for insurers, in terms of customer affordability,” the report says.

“In response to such challenges, insurers are working to alleviate pricing pressures by improving their operating efficiencies by streamlining their business operations, systems and supply chains.”

The ratings agency says some price increases combined with operating efficiencies and lower catastrophe costs will help improve margins for local insurers.

In its review of Australia, S&P sees the highly competitive conditions in non-property-related commercial lines where pricing is softer as a “moderating factor”.

General insurers’ exposure to natural disasters and volatility in the fixed interest market are also seen as areas of concern.

While S&P has kept stable ratings for most Asian countries, it has downgraded China from positive to stable.

“The outlook reflects our expectation of a potential economic slowdown and the deregulation of premium rates for motor insurance in 2012,” the report says.

“Further, insurers’ claims are likely to rise significantly during the next two years because of revised regulatory guidelines.”

These guidelines require insurers to pay up-front third-party motor claims before recovering costs from claims management companies looking after the damaged cars.

S&P expects these factors to offset insurers’ improved financial profiles during the past three years.