The Australian life insurance industry is considered low risk, according to a new report from Standard and Poor’s (S&P).

The assessment is based on the country and industry risk. Australia is ranked the second-strongest on a scale of six, the ratings agency says.

It is one of only eight low-risk markets, alongside France, Hong Kong, New Zealand, Singapore, Switzerland, the UK and the US.

“We continue to believe the creditworthiness of the Australian life insurance industry compares favourably on a global scale given the sector’s strong overall profitability, low product risk and robust regulation,” S&P says.

“The very low country risk provides a framework of economic growth and stability for the life insurance sector.”

S&P has a favourable view of life insurers’ profitability and sees good growth in the years ahead.

Based on data from the Australian Prudential Regulation Authority, the report says life insurers consistently deliver weighted-average returns on equity of about 15% and weighted-average returns on assets of more than 1%.

“This compares favourably to other life insurance markets, where returns are constrained by higher interest rates and longevity risk. We believe returns on equity exceeding 10% are likely, with the fundamentals remaining positive relative to other markets globally that we consider to have structural impediments to higher earnings.”

The report notes that with a significant reduction in adviser commissions looming, and its impact on churn, life insurers are in a good position to improve their financial positions in the medium term.

S&P also has a positive outlook for life insurance products in Australia.

“For individual life insurance products, the sector has a relatively disciplined approach to product design, resulting in relatively less interest rate and longevity risks than other markets.”

Annuities are considered a growth market due to Australia’s ageing population and volatile investment markets.

“Although we expect the proportion of lifetime or guaranteed-return annuities products to grow as a result, we believe the industry has largely approached this opportunity with caution,” the report says.

“We therefore do not anticipate that the sector’s exposure to longevity and interest rate risks will sharply increase during the medium term.”