Life insurers sitting pretty

Australian life insurance companies are expected to benefit further from solid organic growth and ties to the robust funds management industry as well as larger institutions and banks, according to Fitch Ratings.

Research by the global ratings agency found life insurers sat in a strong position and are expected to maintain sound credit profiles throughout 2010-11. Associate director at Fitch Ratings’ Financial Institution's Group, John Birch, said industry growth and strength was underpinned by a relatively stable and healthy economic environment, expected strong population growth and structural support provided by the government mandated superannuation scheme and assistance for life insurance cover.

Fitch Ratings research found in the year ended-March 2010 that risk premium inflows totalled $8.4 billion, which reflected a compound annual growth rate of around 13 per cent over the last 10 years.

The research noted the substantial rise in household indebtedness in Australia, with financial leverage (measured by the ratio of household debt to household disposable income) rising from about 50 per cent in 1992 to above 150 per cent. As such, Fitch Ratings asserted that the insurance requirement to cover these liabilities had increased, providing a platform for the growth of life risk insurance products.

Fitch Ratings stated that while Australian life insurance companies were impacted by a fall in inflows from investment type products, this was offset by the growth of assets within superannuation and funds management industries.

The research noted the dominance of larger financial institutions and the banks in the insurance and funds management space, sectors that would benefit from the “significant distribution capacity of their larger financial parents”. It noted that at end-March 2010, the four major Australian banks held a 49 per cent market share of retail funds under management, and owned eight of the 27 direct life insurers, generating 47 per cent of Australia's annual life risk insurance premiums.

Fitch Ratings was not particularly concerned about the impact of regulatory change, although it conceded that acquisitions by banks and larger financial institutions might prove more difficult.

With rising pressure on net interest margins in the banking sector due to higher funding costs and strong competition, Fitch believes that the contribution made from their life insurance and funds management operations could become increasingly valuable,” Fitch Ratings said. “Moreover, the agency expects acquisitive growth to remain attractive, although increasing regulatory concerns around competition may constrain future deals.