S&P Global Ratings assesses the industry and country risk for health insurers operating in Australia as low. The assessment derives from our view of the sector's low industry risk and Australia's very low country risk.
Country Risk: Very Low
We assess the country risk of Australia as very low, based on our view of the country's economic risk, institutional and governance effectiveness, financial system, and payment culture and rule of law.
We believe that the health insurance sector benefits from the nation's well-developed economy and relatively high income levels. In our view, these factors moderate the risk of significant and sustained downturns, and provide a stable and supportive operating environment for its health insurance industry.
|Australia: Key Economic Indicators|
|Policy rate (Q4 Avg %)||2.00||1.50||1.50||1.50||0.75||0.75||0.75||0.75|
|CPI (avg, yoy%)||1.51||1.28||1.95||1.91||1.59||1.99||2.07||2.26|
|GDP (real, yoy%)||2.46||2.79||2.42||2.74||2.00||2.40||2.41||2.53|
|GDP nom. (US$, bil.)||1,232||1,267||1,386||1,417||1,392||1,413||1,462||1,530|
|Source: S&P Global Economics, Oxford Economics.|
Industry Risk: Low
We assess the industry risk score for Australia's health insurance sector as low. This captures our assessment of the industry's prospective earnings, implications of barriers to entry, the extent to which the market is growing, as well as the broader institutional and governance framework.
We maintain our view that the industry's profitability (as measured by return on equity (ROE)), in aggregate, will remain a key strength with strong industry-based returns achievable over the next two years. We estimate the sector's five-year average ROE to be steady at about 18%. However, the health industry has material concentrations, with the top two insurance providers capturing about 65% of profits from about 53% of premiums, and generating an average ROE of above 40% (see chart 1). Indeed, over the past five years the smallest 20 health insurers' share of gross written premiums has been around 5%, although their profits have fallen considerably from about 6.6% in fiscal 2013 to below 1% in fiscal 2018. This may lead to some consolidation in the next five years.
In addition to the broader industry being able to maintain strong profitability as indicated by aggregate ROE, we also view the industry's barriers to entry, product risks, market growth prospects, and institutional framework as supportive of low industry-related risks.
Factors supporting profitability
- We believe the industry's profitability is somewhat protected by barriers to entry; specifically, the rigorous regulatory and operational requirements. We consider onerous licensing with the Australian Prudential Regulation Authority (APRA) and compliance with the Private Health Insurance Act 2015, as factors that can deter potential entrants. In addition, the presence of large, established incumbents with strong brand loyalty and negotiating power with hospitals and suppliers means it is operationally difficult for new entrants. Based on scale, the market is relatively concentrated with the two largest companies. While there were no new entrants or exits in fiscal 2018, we continue to expect industry consolidation next five years.
- Our view on market growth prospects for Australia's health insurance sector is positive, as premium rate rises broadly align with medical claims inflation. Acting as a moderate headwind to premium rate increases are the government's healthcare reform initiatives that seek to moderate claims inflation, and in turn, premium growth. Private hospital cover participation stood at 45% of the population as of Dec. 31, 2018, slightly down year on year. Both claims inflation and participation remain key sensitivities for the sector.
- In our opinion, Australia's health insurance industry has minimal product risk, reflecting its short-tailed claims profile, well-defined insurance cover, and low exposure to pandemic risk. Australia has high vaccination rates, government pandemic planning, and a well-established public hospital system, which is likely to bear pandemic costs if experienced. Private health insurers also benefit from the APRA-administered risk equalization trust that redistributes funds from insurers paying lower average claims to those with higher average claims.
- We believe that Australia has a robust insurance institutional framework, based on our assessment of the sector's regulatory framework. APRA has endeavored to align the prudential standards for private health insurers with other prudentially regulated insurers through a three phase private health insurance policy roadmap. The roadmap seeks to strengthen prudential standards for private health insurers, improving the industry's sustainability and resilience. Phases one and two, which focused on risk management and governance, have been completed and implemented. Under phase three, APRA will review the capital adequacy framework. Once finalized and implemented, we expect the institutional framework will strengthen in the medium term, supported by oversight and monitoring.
Factors limiting profitability
- The industry is likely to face material headwinds over the next five years, although we see the positives outweighing the potential risks. Key risks include some residual product complexity, an ageing population, an inability to use risk-based pricing, and premium affordability (driven by medical technology inflation).
Related Criteria And Research
- Insurers Rating Methodology, July 1, 2019
- Country Risk Assessment Methodology And Assumptions, Nov. 19, 2013
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 Analyst:||Craig A Bennett, Melbourne (61) 3-9631-2197;|
|Secondary Contact:||Angela Zhou, Melbourne + 61.2.9255.9841;|
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 acknowledgment 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 non-public 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.standardandpoors.com (free of charge), and www.ratingsdirect.com and www.globalcreditportal.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.standardandpoors.com/usratingsfees.
Any Passwords/user IDs issued by S&P to users are single user-dedicated and may ONLY be used by the individual to whom they have been assigned. No sharing of passwords/user IDs and no simultaneous access via the same password/user ID is permitted. To reprint, translate, or use the data or information other than as provided herein, contact S&P Global Ratings, Client Services, 55 Water Street, New York, NY 10041; (1) 212-438-7280 or by e-mail to: firstname.lastname@example.org.