Tokyo: Japanese non-life insurers remain under severe pressure despite an improvement in underwriting performance in fiscal 2002 on cuts in operating expenses and the absence of losses caused by large-scale natural disasters, Standard & Poor''s (S&P) ratings services says in its latest report.

The industry''s overall profitability remains weakened by a deterioration in investment performance, mainly due to falling stock prices, the report says. "A substantial improvement in the business and investment environment is not likely in the short term, and the outlook for the credit quality of the overall industry remains negative," says analyst Runa Ichihari.

"Expense ratios have declined in general, as insurers continue to aggressively reduce costs and reorganise agent networks. However, a drop in profitability from asset investment activities continues to threaten overall profitability," she adds.

Non-life insurers'' capital bases, which had been regarded as relatively solid in the Japanese financial sector, have also shown signs of erosion.

Although industry-wide consolidation has subsided, a new phase of price competition in auto insurance and other core businesses is likely. "The crucial factor for stable profitability continues to be underwriting based on prudential risk management, in addition to cost reductions," Ichihari says.