Standard & Poor’s (S&P) says it is too early to predict what impact proposed life insurance industry reforms will have.

In a report on the Australian industry, the ratings agency says the changes could improve lapse rates.

“However, there remains some uncertainty as to impact on sales from this distribution channel.

“We expect these reforms will be supported by all the main stakeholders in the industry.”

S&P has judged the Australian life insurance industry to be low-risk, based on insurers’ performance.

“We see profitability – measured by return on equity – and product risk as ‘positive’, barriers to entry and market growth prospects as ‘neutral’ and the institutional framework as ‘very strong’. Our favourable view of prospective overall profitability of the sector is underpinned by the generally conservative nature of product design, expectation of continued sound growth and benefits of associated wealth offerings.”

Regulatory data shows that over a five-year period the industry has delivered above-average returns on equity, exceeding 15%, S&P says.

The troubles some insurers faced in 2013 still have not changed the industry’s fundamentals, but returns on equity will remain on the positive side of 10%.

This is despite increased claims in total and permanent disability and income protection.

S&P says life insurers have introduced substantial price rises, tighter underwriting and revised terms and conditions to counter rising claims.

It rates Australian life insurance products as “disciplined”, due to limits on duration mis-matching, use of segregated statutory funds and strong governance and risk controls.

S&P says barriers to entering the Australian life market are “neutral” due to regulatory hurdles and well-established competition.

“There remains a relatively strong level of brand loyalty for established home-grown players. Extensive marketing in retail products, requiring sizable marketing budgets to penetrate customer awareness and compete, enforces brand loyalty.”

The ratings agency says new entrants would need to use advisers for distribution.

“Due to the strong competition for advisers, this channel is a relatively expensive platform for life insurers to utilise. Bank-owned life insurers have the advantage of access to their parents’ extensive networks of advisers and wide customer bases.

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