Australian and New Zealand life insurers are threatened by a volatile and uncertain global economy, Standard & Poor’s has warned in its annual review of the Australia and New Zealand life insurance sector.

Michael Vine, Melbourne-based director of S & P’s financial services ratings, said the industry has withstood the tests of the operating environment, but the industry outlook was “mildly negative”.

“Less certain economic conditions, volatile equity markets, low interest rates, and risk-averse policyholders can influence profitability and overall balance-sheet strength,” he said. “Mild erosion” in the financial strength of Australasian life companies is tipped to be the result.

“The companies most likely to be affected include those already challenged by scale, franchise or financial profile issues, or without the capital or strategic support of stronger parents,” Mr Vine said.

The report says the most significant issues confronting Australian and New Zealand life insurers are the uncertainty currently facing investment markets, the economic outlook, and consumers’ risk appetite. Shareholder profitability has been eroded through the downturn in equity markets, and with consumers preferring less risky products and certain returns, profit margins could be squeezed further.

Despite these difficult economic conditions, the report says the local market has performed well, with strong underlying industry growth dynamics fuelled by superannuation products and generally robust business.

As a result, the Australian market did not generally see reduced bonus rates and revised terminal bonuses, as was the case in the UK.