S&P Global is pessimistic about the Australian mortgage insurance industry’s premium prospects due to regulatory actions amid rising housing market risks.

Premiums contracted about 7% last year, according to Australian Prudential Regulation Authority (APRA) data, and the ratings agency says declines of 5-10% are expected this year and next.

“This could be potentially compounded by lenders seeking alternative risk management options to Australia-based insurers,” analysts Daiwyn Naidoo and Craig Bennett say in a new report.

APRA has sought to curb soaring house prices in the past couple of years and promote responsible lending, constraining high loan-to-value ratio loans on which lenders’ mortgage insurance is used.

A major bank has shifted part of its mortgage insurance requirements offshore, and more recently a material home lender has chosen to retain the risk instead of buying insurance.

Housing demand is likely to moderate as interest rates rise over the next two years, and S&P says financial institutions face an increased risk of a sharp correction in property prices and significant rise in credit losses.

That would increase the risk of material adverse claims experience for lenders’ mortgage insurers, although further actions by authorities could lessen the potential impact, the analysts say.

Market leaders in the sector are Genworth Financial Mortgage Insurance and QBE Lenders’ Mortgage Insurance, while other active participants are bank-owned captive insurers.

S&P says the industry benefits from a very strong institutional framework, while solid profitability is expected to continue despite declining market size.

It assesses industry and country risk in the mortgage insurance sector in Australia as low.