Australian insurers need to find the right balance as they push ahead with charging higher premiums to manage the impact of higher claims and reinsurance costs, at a time when policyholders are also struggling with living costs, S&P Global Ratings says today in a new report.

The rating agency says it expects the industry will be able to “meaningfully” raise premiums but warns the high-cost environment is likely to be prolonged, particularly in relation to claims inflation after the record floods last year and other natural catastrophes.

“Australian insurers face a balancing act in 2023. They are increasing premium rates to offset the rising cost of claims,” the S&P report says.

“However, this risks making policies less affordable at a time when the cost of living is rising, which could dampen new business growth.

“At the same time, cost of catastrophes appears to be increasing. But insurers are equipped to handle this confluence of challenges, in our view.”

S&P says the industry will “continue to manage their exposure to risk by meaningfully increasing the cost of their premiums and re-evaluating their reinsurance arrangements”.

It says the underlying profitability of property and casualty (P&C) insurers will likely strengthen this year as strong premium rate increases will support earnings.

“While the reinsurance market will absorb most of the major claims, insurers will in turn face the rising cost of reinsurance,” S&P says.

“What will continue to stabilise the credit of P&C insurers is their strong capital adequacy, based on our measurement.”

But S&P says it expects the catastrophes to hurt the industry’s financial performance for the year ending June 30.

The report comes after IAG and Suncorp reported their half-year results, and QBE its full-year results for the 12 months to December.

IAG has predicted a stronger second-half as it proceeds with double-digit rate increases to counter inflation while Suncorp says it expects strong premium growth to continue as it adjusts pricing in response to prevailing conditions.

QBE says the business remains cautious about the inflation outlook, particularly for long-tail classes and at the same time is increasing prices in other lines like property.

The S&P report expects “prolonged claims inflation” and reinsurance rates to keep rising this year, posing potential obstacles.

“Rising inflation feeds into expenses and ultimately claims costs,” the report says. “With pressure on the cost of labour and materials, we anticipate the average cost per claim will continue to increase.

“This will lead to higher total claims incurred, which will squeeze profitability.”