Australia's prudential regulator's proposed changes to reinsurance-related capital requirements could help improve Australian insurers' credit profiles in the medium term if they enhance access to reinsurance protection, Fitch Ratings said in a Tuesday release.

However, their financial stability over the long term will depend on insurers' willingness to take on reinsurance, amid external factors like catastrophe reinsurance pricing and the frequency, severity, and cost of natural disasters, the release said.

Fitch believes regulatory adjustments alone may be insufficient to reduce reinsurance costs if catastrophe losses borne by reinsurers continue to escalate.

The Australian Prudential Regulation Authority regulatory changes might have a limited effect on insurers' retention rates due to insurers' internal risk appetite and rating agency capital requirement.

The availability of more reinsurance options will allow insurers to manage their net exposure to catastrophic risks without needing to increase net retentions or probable maximum loss (PML) values, the rating agency said.

This should support insurers' credit profiles by helping them maintain net catastrophe exposure within manageable levels, Fitch added.