The Hayne royal commission will lead to short-term challenges for Australian insurers, says ratings agency Fitch.

But it says successful implementation of Commissioner Kenneth Hayne’s recommendations should also result in long-term benefits.

“Australian insurers are likely to face short-term challenges as they address recommendations … but successful implementation should be credit positive for insurers in the long-term,” Fitch says in the note released today.

It says the final report identified “widespread conduct failings” and behaviour that was below community expectations and in breach of the law.

“The report contained 15 recommendations directed at life and general insurers and concluded that the industry's regulation should be brought into line with that of other financial products and better balance the rights and obligations of insurers and the insured,” Fitch says.

“We believe implementing the recommendations could pressure insurers in the short-term, but will strengthen their business-risk profiles and competitive positioning over time as well as improve customer confidence and the industry’s reputation as a whole.”

The royal commission recommends prohibiting the unsolicited offer or sale of products, adopting a deferred sales model for certain add-on insurance products, and placing stricter caps on sales commissions.

“Such changes to distribution channels could temporarily curb premium growth, but should preserve long-term earning sustainability,” Fitch says.

“The changes are also likely to allow consumers to make more informed decisions, which should in turn improve lapse rates and reduce the likelihood of mis-selling.”

Fitch says insurers may revisit pricing and design of certain products after the royal commission identified poor value products, often sold aggressively due to commission incentives.

“The commission also found limitations in the regulatory framework and recommended to recognise the handling and settling of insurance claims as a financial service and for insurance contracts that are governed by the Insurance Contracts Act to be subject to unfair contract terms provisions.”

S&P Global Ratings agrees that implementing Commissioner Hayne’s recommendations should boost the industry’s reputation.

“Stronger governance, and sales and claims oversight for insurers should benefit the consumer, and ultimately enhance the industry’s reputation,” it says.

It adds that it does not foresee “significant change” in the structure of the insurance industry, with the major players remaining dominant.