The Australian life insurance sector continues to face negative trends, related to heightened claims and reputational risks as well as queries over claims management practices, and the threat of greater regulatory and compliance costs stemming from industrywide reviews, notes S&P Global Ratings. However, at this stage, the international rating agency does not expect these factors to have adverse ratings implications.
The difficult operating conditions have contributed to a number of financial services groups divesting, de-risking, or considering severing their wealth protection operations over the past two years.
Income protection remains a problem child
The industry continues to experience heightened income protection claims, a segment that has been lossmaking for the past three years. S&P expects the repricing and amendments to policy terms and conditions over the past 12 to 18 months to take some time before resulting in improved profitability for this class of business. Although there have been significant price rises in most lines of business over the last two to three years, S&P believes this trend will moderate somewhat over the next few years, with insurers mindful of mitigating any affordability problems.
The life insurance industry's reputation remains somewhat tainted by reports of poor claims management, which triggered a number of reviews and inquiries into the sector over the past two years. S&P anticipates that these reviews could lead to greater regulation and an increase in compliance costs, which could hurt profitability.
Industry participants have been proactive in trying to regain the public's trust by creating a Life Insurance Code of Practice, which outlines a commitment to customer service standards. Twenty-two life insurers have agreed to be bound by the Code from 30 June 2017.
Capitalisation remains robust
Capitalisation, a strength of the industry, remains comfortably above the minimum risk-based regulatory capital requirements. In S&P's view, many of the Australian life insurers it rates also benefit from the income diversity associated with asset management operations, and varying degrees of domestic and international group support.
Another supportive factor is the government-mandated lowering of upfront commissions in 2018. S&P believes that the lower commission structure in a concentrated market with strong brand loyalty could facilitate further improvements in lapse rates.