Australia’s life insurance industry carries low risk and its institutional frameworks are very strong, according to S&P Global Ratings.

“This reflects our view of the industry’s strong regulatory framework and strong regulatory track record, with no deficiencies identified in governance and transparency,” the ratings agency says.

“In our opinion, Australia continues to provide a stable environment for its life insurers, limiting the potential for them to be adversely affected by significant and sustained downturns or domestic external shocks, while being supportive of their sustainable growth.”

S&P praises the Australian Prudential Regulatory Authority (APRA), calling it a “sophisticated regulator” with compliance requirements that are among the best globally.

“APRA has a strong track record of oversight and intervention. It undertakes ongoing supervision in line with global best practices. In our view, APRA maintains sufficient resources to provide appropriate industry oversight.”

S&P expects the sector’s solid profitability to continue despite volatility in certain product lines, namely group lump sum and individual disability income.

Actions to improve the sector, including reforms to adviser commissions and stricter policy terms and conditions, position it to continue performing well in the next couple of years.

Claims are expected to stabilise and lapse rates to improve further, S&P says.

Regulatory data over a five-year period to last December shows the sector has consistently delivered returns on equity of about 10% and returns on assets exceeding 10%.

“The sector’s sound profitability is underpinned by the generally conservative design of risk products, and our expectation of continued sound growth and the benefits of associated wealth offerings,” S&P says.

“This compares favourably to some other life insurance markets, where returns are constrained by higher interest rates and longevity risk.”