S&P revised Australia's mortgage insurance sector industry risk from low to “moderately high” and says profitability will be pressured by worsening economic conditions.

Risks are “firmly on the downside” given uncertainty surrounding the duration of the current COVID-19 related downturn and the timing and extent of the rebound, it says.

The ratings agency says early signs that volumes were rising emerged before the COVID-19 pandemic but now demand for mortgage insurance will soften further over the next 12 months, reflecting less activity in the housing market.

“Market growth prospects are not supportive of the sector's near-term profitability,” S&P said.

Australia is not immune to the impact of coronavirus and “the shape and form of recovery remains unclear,” S&P says.

The ratings agency is forecasting a 4% economic contraction in Australia this year and 7.5% unemployment.

A decline in demand for houses will impact headline premiums and higher unemployment could lead to an increase in claims costs for two to three years, weighing on profits, S&P says.

The ratings agency expects mortgage insurers' profitability will moderate further over the next one to two years, with the number of new policies written contracting and increasing claims resulting from higher unemployment and a potential decline in property values.

New mortgage insurance premiums have contracted for each of the past five years, largely due to reduced risk appetite due to lending constraints imposed by the regulator.