Strong competition in commercial insurance lines has attracted the attention of the Australian Prudential Regulation Authority (APRA), which is investigating pricing.

The regulator says there is a risk of competitive pressures leading to inadequate pricing by some insurers.

It is examining the issue “to assist supervisors in their engagement with insurers on pricing strategies and processes”, according to the latest APRA Insight report.

“Reserving risk is also heightened at present because pressures on insurers’ results through, for example, lower investment income may prompt some to use reserve releases to aid short-term profitability, potentially compromising reserving adequacy,” it says.

APRA finds little appetite in the local market for alternative reinsurance capital such as catastrophe bonds, with insurers preferring traditional reinsurance which is readily available at favourable terms.

It says insurers value long-standing relationships with their reinsurers and the certainty of traditional funding.

The regulator warns the affordability of natural perils cover, particularly in north Queensland, “remains an area of reputational and potential political risk for the industry”.

APRA says despite increasing concentration in personal and commercial lines, there is healthy competition in the market.

“An important source of competition in personal lines is provided by a number of challenger brands in the market, which continue to gain momentum and are starting to erode some of the established brands’ market share.”