S&P paints a poor picture

It says the industry is languishing due to a low national savings rate and few tax incentives for superannuation products.

Some parts of the market, such as single premium business, are in decline while annual premium business is only rising slightly.

Also trust-based products become more popular with consumers, compared to risk ones.

S&P says this situation has intensified competition between insurers, with added pressure coming from the large number of small life insurers also struggling for scale in a flat market.

It says companies will reassess their long-term prospects in the face of a poor outlook for business volumes and profits.

Three of the other big issues insurers face are:

• Companies writing substantial amounts of capital-guaranteed business might find their capital levels come under pressure if asset prices continue to fall.
• Profits are expected to decline as funds under management shrink due to lower inflows and falling asset values.
• The current uncertain economic environment is changing consumer preferences towards less risky products. This might lead to lower in-flows for investment-related products.

S&P says life insurers are increasingly relying on equity investments to meet their revenue and profit targets and about 58% of life company assets are now in this area.

This situation "exposes the very resources held to protect against insurance risk to further volatility," it says.

The relatively positive economic environment in recent years, together with increased pressure on life companies to boost shareholder returns, has encouraged many life offices to reduce their capital levels, it says.

In some cases this trend had gone too far, and has led S&P to downgrade insurers’ credit ratings.