Standard & Poor’s (S&P) has downgraded its outlook to negative on the general insurance markets in Japan, India and New Zealand but upgraded China and Malaysia to positive. The outlook for other Asian markets, including Australia, remains stable.

The ratings agency says premium revenue in developing Asian markets will grow by more than 20% due to low penetration and strong real GDP rates.

“Much of the growth is likely to be in China and India, followed by Indonesia, Thailand and Vietnam”, it says in a report on the sector.

Underwriting earnings are likely to improve in most markets except Japan and New Zealand. S&P says divergence between markets has increased due to variable pricing trends.

“Heavy flooding and storms in Australia, for example, cut underwriting profits in 2010, and that is likely to continue in 2011,” it notes. “Insurers in Australia and New Zealand have now raised their prices, which should strengthen underlying underwriting earnings in 2011.”

The agency notes that reinsurance costs are expected to rise as a result of disasters in the region, and this will flow through to premiums, particularly in Australia, New Zealand and Japan.

S&P says it downgraded Japan because of a likely deterioration in earnings and capital as insurers start to meet the costs of the tsunami and earthquake. Stock market volatility will also hit insurers’ earnings.

New Zealand was downgraded because of the earnings impact from the February earthquake, the availability of reinsurance capacity, and pricing. However, S&P notes the market benefits from a high degree of ownership by highly rated Australian parent companies and insurance via the Earthquake Commission.

S&P says the Australian market is mature and sophisticated, with robust regulation and strong capital and reserves, so is being maintained at “stable” despite recent disasters. The agency expects premiums to rise and says pricing in personal lines has hardened moderately in the past year and this trend is likely to continue. Commercial lines remain soft, in part due to ample foreign capacity.

Premium rates in China have increased to more reasonable levels after regulatory intervention, particularly in motor business lines, which account for about 60% of premiums, and S&P expects the industry’s operating performance and opportunities to grow.