Moody's says outlook for Australian P&C sector stable

Moody's Investors Service says that the outlook for Australia's general insurance industry is stable, but 2009 is likely to prove a challenging year, given the state of the global and local economies.

"Accordingly, Australian insurers will look more closely at their own operations from a cost-and-productivity perspective," says Wing Chew, a Moody's VP/Senior Analyst, adding, "Separately, more merger and acquisition opportunities will likely emerge because of the drive to improve productivity and reduce costs."

Chew's remarks coincided with the release of Moody's latest outlook—which he authored—for Australia's P&C sector. The wide-ranging report looks at the impact of the global and domestic downturn and financial crisis, business trends, financial fundamentals and regulatory issues, such as reforms.

"While 2008 was a difficult year—due to a string of weather-related events—Australia's plans to stimulate its economy should ultimately benefit the insurance industry," says Chew. "Rate increases on renewals of retail books should help the industry recoup some of the losses it had experienced because of storms in 2008."

"In addition, the robust character of the prudential framework has helped the industry survive the problems brought about by the convergence of an unprecedented number and scale of weather-related losses and the dramatic fall in the value of investments held by insurers," says Chew. "And despite the difficult nature of the credit market, Australian insurers with established track records have been able to obtain both debt and equity funding, although it has been at higher cost."

Looking ahead and unlike in the past, the report says that the opportunity to increase bottom lines by reserve releases from long tail claims is limited, given the level of past releases and increasing claims costs, especially in statutory classes.

In 2009, the more established insurers will also be looking to achieve growth through acquisitions, joint ventures and consolidations, domestically and abroad

The report is entitled Australian Property and Casualty Insurance Industry Outlook: Industry to Face More Challenges and Undergo More Consolidation.