- 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.
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.
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.
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.
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.
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.
- 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;|
|Michael J Vine, Melbourne + 61 3 9631 2013;|
|Secondary Contacts:||Angela Zhou, Melbourne + 61.2.9255.9841;|
|Julian X Nikakis, Sydney (61) 2-9255-9818;|
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