New entrants may find it difficult to overcome regulatory and distribution barriers in the Australian life insurance market, according to an industry report by Standard & Poor’s (S&P).

However, the ratings agency considers these barriers “moderate”.

“The regulator requires life insurers to demonstrate they can meet a range of minimum standards in their chosen lines of business before they can be granted an authority to operate,” it says. “The process is relatively prescribed and transparent and it is not viewed as overly demanding or lengthy.”

Regarding distribution, new entrants must overcome strong brand loyalty for local companies.

“For life insurers offering individual products, there is also a need to distribute through a network of advisers to sell material volumes. Due to the strong competition for advisers, this channel is a relatively expensive platform for life insurers to utilise.

“It is consequently difficult for new entrants to compete against the scale and sophistication of established players that own end-to-end value chains.”

The report says Australian life insurers’ return on equity is “positive”, despite some worries about profitability.

“While there have been recent concerns about the profitability of the sector, we believe the fundamentals remain positive relative to other markets globally that we consider to have structural impediments to higher earnings.”

S&P puts the weak performance down to income protection, total and permanent disability (TPD) and group risk lines – with all three suffering higher claims and lapse rates owing to poor pricing and the state of the Australian economy.

“We expect claims in income protection, TPD and group risk business lines to remain elevated in the short term but to be offset by significant premium rate increases and more conservative benefit designs that are progressively being implemented across the industry.”

S&P notes the life industry has delivered an average return on equity above 12%, confirming a positive outlook for the market.

“This compares favourably with other life insurance markets where returns are constrained by higher interest rate and longevity risk.”