Key Takeaways
- The creditworthiness of Australia-based insurers will remain solid in 2023, underpinned by strong capital adequacy.
- Higher premium rates and an unwinding of unrealized losses will fortify the earnings of property/casualty insurers. Further natural catastrophes may temper this.
- A rise in the cost of claims and expenses looms because of steep inflation, higher cost of reinsurance, and increased investment in and management of cybersecurity.
Australian insurers face a balancing act in 2023. They are increasing premium rates to offset the rising cost of claims. However, this risks making policies less affordable at a time when the cost of living is rising, which could dampen new business growth. At the same time, cost of catastrophes appears to be increasing. But insurers are equipped to handle this confluence of challenges, in our view.
Insurers To Manage Exposure
We expect insurers will continue to manage their exposure to risk by meaningfully increasing the cost of their premiums and reevaluating their reinsurance arrangements. As a reflection of this, we have stable rating outlooks on life, property/casualty (P/C), health, and lenders mortgage insurers.
Property/Casualty Insurance
The underlying profitability of P/C insurers will likely strengthen in 2023. Strong premium rate increases will support earnings. The several catastrophes that Australia endured in calendar 2022 will hurt the performance in fiscal 2023 (year ending June 30). Headline earnings have also felt the squeeze of unrealized valuation losses.
While the reinsurance market will absorb most of the major claims, insurers will in turn face the rising cost of reinsurance. What will continue to stabilize the credit of P/C insurers is their strong capital adequacy, based on our measurement.
Chart 1
Chart 2
Chart 3
Life Insurance
We expect life insurance profitability to strengthen over the next 12 months. Driving this is the continued improvement in the profitability of individual disability income insurance (IDII) along with rises in premium rates across all lines. IDII was loss-making prior to 2021. Higher interest rates will also bump up profitability as insurers release reserves on long-tail products and benefit from higher yield on reinvestment.
Capital adequacy continues to be a strength and should remain solid, with ownership from supportive offshore parents.
Chart 4
Chart 5
Chart 6
Health Insurance
The profitability of health insurance will likely remain strong over the next 12 months. Driving this is solid premium growth and a stabilization in claims frequency following the pandemic. Regulatory capital requirements will likely increase for the sector due to the implementation of the new capital standards from July 1, 2023. However, we expect Australian health insurers will remain well-capitalized.
Chart 7
Chart 8
Chart 9
Lenders Mortgage Insurance
Higher interest rates will likely affect mortgage quality, and in turn mortgage insurers. We expect higher claims to emerge throughout 2023, with greater impact in the third and fourth quarter. In the lead-up, we project profitability for mortgage insurers to remain strong, supported by improved investment returns. The following factors underpin profitability for the sector: very low unemployment; recent house price appreciation; strengthened underwriting controls; and appreciable repayment buffers.
Capital adequacy has been a key strength of the mortgage insurers. This reinforces credit quality, and is necessary because claims can emerge over long periods.
Chart 10
Chart 11
Chart 12
Well Placed For A Balancing Act
Insurers are well placed for the year. Their creditworthiness derives support from robust capital buffers and steady increases in profitability. These attributes will be critical if the frequency and severity of natural disasters mirrors that of 2022. They will also be crucial in the face of man-made threats. Notably, the rise in living costs and threats to cybersecurity.
Related Research
- Credit Conditions Asia-Pacific Q1 2023: Still Above Water, Dec. 1, 2022
- Economic Research: Economic Outlook Asia-Pacific Q1 2023: Global Slowdown Will Hit, Not Halt, Growth, Nov. 28, 2022
- Insurance Industry And Country Risk Assessment: Australia Life, Nov. 17, 2022
- Insurance Industry And Country Risk Assessment: Australia Mortgage, July 25, 2022
- Insurance Industry And Country Risk Assessment: Australia Property/Casualty, June 21, 2022
- Insurance Industry And Country Risk Assessment: Australia Health, May 19, 2022
Editor: Lex Hall
Designer: Halie Mustow
This report does not constitute a rating action.
S&P Global Ratings Australia Pty Ltd holds Australian financial services license number 337565 under the Corporations Act 2001. S&P Global Ratings' credit ratings and related research are not intended for and must not be distributed to any person in Australia other than a wholesale client (as defined in Chapter 7 of the Corporations Act).
| Primary Credit Analysts: | Craig A Bennett, Melbourne + 61 3 9631 2197; craig.bennett@spglobal.com |
| Michael J Vine, Melbourne + 61 3 9631 2013; Michael.Vine@spglobal.com | |
| Secondary Contacts: | Angela Zhou, Melbourne + 61.2.9255.9841; angela.zhou@spglobal.com |
| Julian X Nikakis, Sydney (61) 2-9255-9818; julian.nikakis@spglobal.com |
No content (including ratings, credit-related analyses and data, valuations, model, software, or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced, or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor’s Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees, or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness, or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an “as is” basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT’S FUNCTIONING WILL BE UNINTERRUPTED, OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages.
Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P’s opinions, analyses, and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment, and experience of the user, its management, employees, advisors, and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. Rating-related publications may be published for a variety of reasons that are not necessarily dependent on action by rating committees, including, but not limited to, the publication of a periodic update on a credit rating and related analyses.
To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw, or suspend such acknowledgement at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal, or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof.
S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain nonpublic information received in connection with each analytical process.
S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, www.spglobal.com/ratings (free of charge), and www.ratingsdirect.com (subscription), and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at www.spglobal.com/usratingsfees.