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Insurance capacity is rising and premiums are falling sharply in Australia, a recent survey shows.

Capacity in Australia's non-life insurance industry has increased in the 12 months ending June 30, and similar growth is expected for next 12 months, the survey says.

Peter Caldwell, national industry group chairman for accounting firm Deloitte Touche Tohmatsu, said reinsurance overcapacity and the absence of a large-scale catastrophe have forced a drop in reinsurance rates that is expected to continue.

As a result, rates have fallen dramatically and capacity has increased significantly for property and business interruption insurance, public and product liability, and professional indemnity/directors and officers' liability insurance, Mr. Caldwell said.

Melbourne, Australia-based Deloitte Touche Tohmatsu and Sydney-based stockbroker Ord Minnett surveyed 19 of Australia's 20 largest underwriters and brokers, one government-owned non-life insurer and eight of Australia's 15 largest reinsurers.

Fire and property/business interruption capacity rose 20%, while reinsurance and primary rates for these risks both dropped 18%, the survey found.

Public and product liability capacity increased 19%, while primary rates fell 17% and reinsurance rates fell 11%. For professional indemnity and D&O insurance, capacity was up 18%, while primary rates fell 18% and reinsurance rates dropped 10%.

Capacity for professional indemnity and D&O insurance in Australia has increased because of "strong profitability in this class in recent years," the survey authors said.

"Over the last three years, we estimate that premium rates have declined by 36%, which is the largest fall for any of the major classes of reinsurance," the survey stated.

In contrast, workers compensation capacity rose only 2%, while primary rates rose 1%, and reinsurance rates fell 11%.

Many insurers surveyed said the non-life market is one of the softest they could remember, and they think rate reductions were "overdone relative to the risk being insured," Mr. Caldwell said.

"In this sort of environment, it is likely that the industry will find revenue growth difficult and, more importantly, profitability will come under pressure," he said.

The survey found Australian reinsurance rates fell "significantly" across all classes of reinsurance due to overcapacity in the market. Most of the survey respondents also said that they do not think reinsurance rates have bottomed out.

The major issues facing the non-life industry are rating adequacy and excessive competition, the survey found.

The industry expects a similar outlook for the current financial year. Primary rates are again expected to decline, though less dramatically, the survey said.

"The key will be the increase in capacity, which historically the industry has not predicted well," Mr. Caldwell said.

Most of the industry expected rates to harden in 1999, but the survey said figures generally were based more on hope than "concrete reason."

For more information on the survey, contact Nick Chipman or Dale McKee at Price Waterhouse, GPO Box 2798Y, Melbourne, Victoria, Australia 3001; fax: 61-7-9666-6444.