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Insurance Industry And Country Risk Assessment: Australia Property/Casualty

S&P Global Ratings assesses as low risk the industry and country risk in the property/casualty (P/C, also referred to as non-life) insurance sector of Australia (AAA/Negative/A-1+; unsolicited ratings). This assessment is the second-lowest risk on our scale and comprises the very low country risk as well as the low Australian P/C sector risk.

Australian operating conditions have been affected by the COVID-19 pandemic and related market volatility. Australia's P/C insurers have principally been affected by market volatility while business performance has been affected by quarantine and distancing requirements. Overall, the Australian insurance sector has transitioned seamlessly to a distributed working arrangement, while some lines of business have benefited from lower claims due to lower economic activity. Slower than expected remediation of pricing for commercial, and small and midsize enterprise segments reflects economic impacts. We expect activity to remain subdued for calendar 2020 although government fiscal stimulus packages and the accommodative monetary stance will relieve some particular pressures.

Real GDP has averaged about 2.3% over the past four years (see table 1), although we expect this to average at just 1.6% over the next three. The contraction in calendar 2020 reflects the sharp economic downturn following COVID-19 pandemic shut-down measures. This follows a period of some 29 years of uninterrupted economic growth for Australia reflecting good employment levels and steady population growth. Pressure on the economy is also recognized in the policy interest rate edging lower to 0.25%, and the consumer price index (CPI) to decline to a new low of just 0.5%. Up until 2022, S&P Global Ratings expects moderate growth in gross written premiums across personal and commercial lines led by incremental premium hardening and moderate unit growth off the back of continued modest GDP growth.

Our Australian P/C sector evaluation incorporates the aggregate historic strong operating performance across personal and commercial lines. We consider the sector well developed and advanced in terms of pricing and risk controls. As of March 31, 2020, there were 97 licensed entities including some of the largest global P/C insurers, instilling a highly competitive operating environment that is supported by global reinsurers. Local insurers have been particularly effective in managing large claims and exposure to natural peril and catastrophe events through reinsurance.

Our low risk assessment for Australia's P/C insurance sector is among the lowest globally. The combination of a very low country risk assessment and low insurance risk sector assessment results in a low risk Australia P/C sector Insurance Industry And Country Risk Assessment (IICRA), which is our second-lowest risk assessment. As of May 7, 2020, there were 11 countries with a very low country risk and low risk P/C sector assessment (see chart 1). Of those 11 countries, only Switzerland (AAA/Stable/A-1+; unsolicited ratings) had a very low risk IICRA, the remainder (Australia, Austria, Canada, Denmark, Finland, Germany, Norway, Singapore, Sweden, and Switzerland) we assess as low risk (see chart 2).

Chart 1


Chart 2


Country Risk: Very Low

We assess the country risk of Australia as very low, based on our view of the very low political risk and a strong payment culture and rule of law. In our opinion, Australia continues to provide a supportive and stable economic environment for P/C insurers, benefiting from effective public policymaking. That policymaking has supported the economy's resilience to external shocks, and mitigates the impact of external imbalances while being supportive of sustained profitable growth for P/C insurers. In our view, the financial system benefits from the sovereign's strong creditworthiness and effective political structure.

The country's rate of economic growth has been resilient, although relatively low, averaging about 2.3% over the past three years and we expect this to average about 1.6% over the next three years to Dec. 31, 2022. The downtrend in calendar 2020 reflects the effects of COVID-19 related shutdowns. We expect the rate of GDP growth to remain under pressure and decline by 4.0% for the year ended 2020 before incrementally improving toward 3.1% to Dec. 31, 2022, while the forecast policy rate is expected to remain 0.25% for a few years (see table 1).

Table 1

Key Economic Indicators
Economic forecast summary: Australia (April 20, 2020)
2016 2017 2018 2019 2020f 2021f 2022f
Real GDP (YoY growth %) 2.8 2.5 2.7 1.8 (4.0) 5.7 3.1
CPI (avg. YoY %) 1.3 1.9 1.9 1.6 0.5 1.0 1.5
Unemployment rate (period avg. %) 5.7 5.6 5.3 5.2 7.5 6.8 6.1
Policy rate (Q4 EOP %) 1.50 1.50 1.50 0.75 0.25 0.25 0.50
Exchange rate (per US$) at year-end 1.33 1.30 1.39 1.46 1.54 1.49 1.45
CPI--Consumer Price Index. Avg.--Average. YoY--Year on year. EOP--End of period. f--Forecast. Years ending Dec. 31. Source: S&P Global Economics, S&P Global Ratings, Oxford Economics.

P/C Insurance Sector Industry Risk: Low Risk

We assess the industry risk for Australia's P/C insurance sector as low. Key elements that are supportive include the industry's sound profitability, as measured by return on equity, and strong institutional framework. Product risks, barriers to entry, and market growth prospects are supportive of the sector's risk profile and we assess these as neutral.

Steady real GDP growth has supported the operating performance of the P/C sector, with nominal direct P/C premium growth strengthening since 2016 (see chart 3). Nominal direct P/C premium growth, excluding mortgage insurance, grew by 5.0% on average in the three years to Dec. 31, 2019. This rate of growth was dampened regulated pricing adjustments to compulsory third-party (CTP) insurance, and system growth was well above average CPI and real GDP growth rates (with real GDP growth averaging 2.3% for the three years to Dec. 31, 2019). Premium growth predominantly reflected increased premium rates with nominal volume growth across the three years (excluding mortgage insurance and CTP). Premium growth in the year to March 31, 2020, was 5.8%, slightly above the Dec. 31, 2019, full growth of 5.5%, and we expect COVID-19 uncertainty to materially affect GDP and bring premium growth down to about 3.5% for the year to Dec. 31, 2020 (see chart 3).

Chart 3


Our base-case expectation is for Australia's P/C insurers to generate an underlying return on equity above 10% over the medium term (i.e., removing realized and unrealized investment gains or losses), with the exception of calendar 2020 where returns are expected to be about 5%. Historic underlying returns have benefited from improved risk-based pricing, premium rate increases, and well-structured reinsurance arrangements. Continued efficiency initiatives across operations and claims management have moderated the impact of claims inflation--particularly in some short-tail personal lines.

The sector's recent operating performance has been under pressure from catastrophes and natural perils. Industry net profit for the year to March 31, 2020, was particularly affected by monsoon flooding in Townsville and hailstorms in south-east Queensland and New South Wales in the fourth quarter of 2018 and first quarter of 2019, and bushfires and storms in the first quarter 2020. Chart 4 illustrates the increasing frequency of catastrophes declared in Australia since the late 1960s.

Chart 4


Underwriting results continue to benefit from sound reinsurance in the main, although operating performance across commercial lines and long tail class of employer liability including the directors and officers line remain adverse. While the sector's average underlying return on equity declined to about 7.5% for the year to March 31, 2020, the average for the past five years was above 11.0% (see chart 5). We expect effective risk management and appropriately structured reinsurance arrangements to moderate the impact of future large claims and catastrophic events.

Chart 5


The industry benefits from a very strong institutional framework with all insurers required to maintain an appropriate license and subject to oversight and supervision by the Australian Prudential Regulation Authority (APRA). We consider APRA as sophisticated with regard to its policy and regulatory framework (including the internal capital adequacy assessment process); it conducts periodic independent reviews of risk frameworks and practices, and frequent reporting. There has been recent investment in the regulatory oversight and monitoring areas of licensed insurers subsequent to the findings following the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.

Factors limiting profitability
  • Australia's P/C insurers are predominantly exposed to domestic natural disaster events although some insurers have insurance exposure to global events. Domestic natural perils contribute to earnings volatility through higher gross claims, with recent events spanning flooding, bushfire, severe weather and storms, and low loss earthquake. On a net claims basis, the benefits from sound risk management and robust reinsurance arrangement become evident, while the certainty of reinsurance recoveries benefits from high-quality counterparties. In the main, P/C insurers operating in Australia have a well-diversified and high quality panel of reinsurers participating in their programs.
  • We expect market growth prospects for Australian P/C market to be moderate, with growth to benefit from some further rate hardening and supplemented by the return of unit growth. Further rate hardening in commercial lines will be added to with moderate rate growth across home and contents and domestic motor reflecting claims costs. Claims have recently been affected by natural perils and higher repair costs. Insurance penetration, as measured by gross premiums written relative to nominal GDP, has remained relatively stable over the past five years and is unlikely to increase materially.
  • New technologies are emerging and driving innovation, as well as disruption, across many sectors including P/C insurance. The scale of investment and prominence of innovation by incumbents is evident, although at this stage it has only incrementally enhanced components of the product offering and not covered the added expenditure.
  • Lower-for-longer general market interest rates have affected the return on insurers' investment portfolios and reserve requirements for long-tail lines affecting overall profitability. A moderating factor has been the lengthened duration of investment portfolios, and some increased allocation in growth assets and nonfinancial institution related fixed income securities.
Factors supporting profitability
  • The barriers to entry for participants in the Australian P/C industry recognizes the quality of regulation as well as the operational barriers existing. Access to the Australian P/C sector is subject to regulatory approval and not limited by law or as part of restrictive government policy. Our assessment of the industry risks recognizes the level of sophistication and comprehensiveness involved in the APRA license approval process. We also consider operational barriers as neutral reflecting material challenges involved with establishing a meaningful market presence against incumbent P/C participants with strong brand, established distribution platforms, and extensive risk-based pricing experience. While there are some smaller regulated products specific to some states, such as CTP motor vehicle insurance, the majority of products offered are subject to open market competition.

Related Criteria

  • 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:Michael J Vine, Melbourne (61) 3-9631-2013;

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