Rating agency Standard & Poor’s (S&P) has confirmed what analysts have been saying for months – the increasingly competitive local market is pushing premiums down. But not all rates are falling – in fact some are rising – and local rates are still at a profitable level.

Looking ahead for the rest of the year, S&P says insurers will again bring home some substantial profits, but after that there will be some unease around their pricing discipline.

In its latest “industry report card” for the general insurance industry, S&P reported premium rates increases of 5-20% across various commercial lines for the first quarter. 

Property and liability classes experienced the most significant rate increases, but S&P says mid-size risks are also now experiencing pricing pressure. 

“Policy terms and conditions remain strong, and the extensions of cover and reduced excesses, apparent in the last softening cycle, have not yet appeared in the local market.”

S&P says a key issue arising from the softening rate cycle will be “the degree of pricing discipline that exists in the industry”.

“In the event that some Australian market participants lower prices too far and reduce operating profits, the industry’s improved focus on underwriting profit and its use of better tools… should help the industry to limit any profitability downside.”  

The report says the fact that the industry has reported profits rather than losses for three years running supports insurers’ rationale in “mild adjustments to premium rates… without materially affecting profitability”.

Softening rates “are a global issue”, it says. “The fact that rates have reduced across all lines in the first half of 2005… suggests that rate reductions are not fully accounted for by the improved underlying claims experience.”

S&P says some rate reductions are purely for competitive reasons, and no longer the result of profitable operating conditions.

The ratings agency says personal lines rates “remain robust, and are unlikely to see premium rate reductions”.