This was the Service cable at yesterdays inspection. It appears to be either 2/0 awg or 3/0 awg aluminum. There is a 200 amp main. The wire is undersized for this size of breaker?

I’d almost bet that’s old tinned copper. It may well be undersized, but I can’t really tell.

Since the service cable is outside, would this be an issue. I had our service upgraded several years ago. The elctrical company at that time
did not upgrade the service drop, from the pole to our house. They said that if the wire should fail they would upgrade at that time.

Not sure I follow you. The aerial drop or underground lateral is typically under the ownership and control of the power company, but the service cable from the point of attachment and on inside is typically yours. There might be some strange ownership and control issues in your area that are clouding the waters here, but suffice it to say that no one would ever suggest that an undersized service entrance cable remain, since it is sized to NEC rules. The aerial drop or underground lateral is sized to a different set of rules, and can appear undersized to the lay person, but that’s not what we’re dealing with in your picture.

You are correct in your statment above. Since the SEC is undersized for the 200 amp breaker I will be putting it in my report to correct.

I would also note those three grey wires entering from the right side. For one thing the connector looks way too small, and second they look like they are not part of a cable and are not in conduit.
See the slim view outside the panel to the right in the image?

Here is a pic of the SEC on the house. The more I look at it, it may just be a 60amp service with a 200amp main in the panel.

You have older unprotected cable there, uncertain of the size, I think enough to justify calling for an evaluation by an electrician.
It also looks like insufficient overhang on the roofing, bet water’s getting in under the siding there.

John Kogel