Trouble ahead for life insurers, S&P predicts

Already grappling with a tarnished reputation following recent scandals, the life insurance sector could face further threats depending on the outcome of ASIC's industry-wide review, according to S&P Global Ratings.

In a statement, the ratings house said the creditworthiness of Australia's life insurance industry should remain stable in the next year, despite a short-term risk of consumers reducing or withdrawing their life insurance cover as a result of the CommInsure scandal.

A more substantive risk, however, lies in what may follow from ASIC's recently announced probe into the life insurance industry.

"The eventual outcome of the myriad of life insurance reviews is difficult to determine. In fact, more demanding inquiries for the industry could also ensue," the statement said.

"As such, the main risk to the industry lies in the medium term in relation to potential for changes in the industry's structure and regulation. While it is clear cut there will be more, not less, regulation, how much more and at what cost to margins remains a significant unknown."

Meanwhile, while lapse rates have been high for policies sold through financial planners, proposed reductions to upfront commissions are expected to improve these rates.

"A key question is whether this initiative will reduce sales as a result of financial planners exiting the industry given the loss of income and more onerous requirements in relation to education, sales practices, and disclosure," S&P said.

"We suggest there is unlikely to be a mass exodus based on the lack of such a trend when some licensed advisers had their commissions cut pre-emptively by their insurer to a similar extent in 2015."

Further, S&P predicts claims are likely to stabilise over the next two years, yet remain at heightened levels.

"Over recent years, industry players have reacted to the challenging operating environment with numerous measures designed to improve claims performance, with more substantial change occurring for group life risk given the extent of policy losses in 2013," the statement said.

"While such initiatives can be made with immediate effect on new business, the impact on the existing policies will necessarily take longer to translate into meaningful improvement."

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