Rationale
S&P Global Ratings assesses the industry and country risk for health insurers operating in Australia as low. The assessment derives from our view of the sector's low industry risk and Australia's very low country risk.
Country Risk: Very Low
We assess the country risk of Australia as very low, based on our view of the country's economic risk, institutional and governance effectiveness, financial system, and payment culture and rule of law.
We believe that the health insurance sector benefits from the nation's well-developed economy and relatively high income levels. In our view, these factors moderate the risk of significant and sustained downturns, and provide a stable and supportive operating environment for its health insurance industry.
Table 1
| Australia: Key Economic Indicators | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2015 | 2016 | 2017 | 2018 | 2019F | 2020F | 2021F | 2022F | |||||||||||
| Policy rate (Q4 Avg %) | 2.00 | 1.50 | 1.50 | 1.50 | 0.75 | 0.75 | 0.75 | 0.75 | ||||||||||
| CPI (avg, yoy%) | 1.51 | 1.28 | 1.95 | 1.91 | 1.59 | 1.99 | 2.07 | 2.26 | ||||||||||
| GDP (real, yoy%) | 2.46 | 2.79 | 2.42 | 2.74 | 2.00 | 2.40 | 2.41 | 2.53 | ||||||||||
| GDP nom. (US$, bil.) | 1,232 | 1,267 | 1,386 | 1,417 | 1,392 | 1,413 | 1,462 | 1,530 | ||||||||||
| Source: S&P Global Economics, Oxford Economics. | ||||||||||||||||||
Industry Risk: Low
We assess the industry risk score for Australia's health insurance sector as low. This captures our assessment of the industry's prospective earnings, implications of barriers to entry, the extent to which the market is growing, as well as the broader institutional and governance framework.
We maintain our view that the industry's profitability (as measured by return on equity (ROE)), in aggregate, will remain a key strength with strong industry-based returns achievable over the next two years. We estimate the sector's five-year average ROE to be steady at about 18%. However, the health industry has material concentrations, with the top two insurance providers capturing about 65% of profits from about 53% of premiums, and generating an average ROE of above 40% (see chart 1). Indeed, over the past five years the smallest 20 health insurers' share of gross written premiums has been around 5%, although their profits have fallen considerably from about 6.6% in fiscal 2013 to below 1% in fiscal 2018. This may lead to some consolidation in the next five years.
In addition to the broader industry being able to maintain strong profitability as indicated by aggregate ROE, we also view the industry's barriers to entry, product risks, market growth prospects, and institutional framework as supportive of low industry-related risks.
Chart 1
Factors supporting profitability
- We believe the industry's profitability is somewhat protected by barriers to entry; specifically, the rigorous regulatory and operational requirements. We consider onerous licensing with the Australian Prudential Regulation Authority (APRA) and compliance with the Private Health Insurance Act 2015, as factors that can deter potential entrants. In addition, the presence of large, established incumbents with strong brand loyalty and negotiating power with hospitals and suppliers means it is operationally difficult for new entrants. Based on scale, the market is relatively concentrated with the two largest companies. While there were no new entrants or exits in fiscal 2018, we continue to expect industry consolidation next five years.
- Our view on market growth prospects for Australia's health insurance sector is positive, as premium rate rises broadly align with medical claims inflation. Acting as a moderate headwind to premium rate increases are the government's healthcare reform initiatives that seek to moderate claims inflation, and in turn, premium growth. Private hospital cover participation stood at 45% of the population as of Dec. 31, 2018, slightly down year on year. Both claims inflation and participation remain key sensitivities for the sector.
- In our opinion, Australia's health insurance industry has minimal product risk, reflecting its short-tailed claims profile, well-defined insurance cover, and low exposure to pandemic risk. Australia has high vaccination rates, government pandemic planning, and a well-established public hospital system, which is likely to bear pandemic costs if experienced. Private health insurers also benefit from the APRA-administered risk equalization trust that redistributes funds from insurers paying lower average claims to those with higher average claims.
- We believe that Australia has a robust insurance institutional framework, based on our assessment of the sector's regulatory framework. APRA has endeavored to align the prudential standards for private health insurers with other prudentially regulated insurers through a three phase private health insurance policy roadmap. The roadmap seeks to strengthen prudential standards for private health insurers, improving the industry's sustainability and resilience. Phases one and two, which focused on risk management and governance, have been completed and implemented. Under phase three, APRA will review the capital adequacy framework. Once finalized and implemented, we expect the institutional framework will strengthen in the medium term, supported by oversight and monitoring.
Factors limiting profitability
- The industry is likely to face material headwinds over the next five years, although we see the positives outweighing the potential risks. Key risks include some residual product complexity, an ageing population, an inability to use risk-based pricing, and premium affordability (driven by medical technology inflation).
Related Criteria And Research
Related Criteria
- Insurers Rating Methodology, July 1, 2019
- Country Risk Assessment Methodology And Assumptions, Nov. 19, 2013
This report does not constitute a rating action.
S&P Global Ratings Australia Pty Ltd holds Australian financial services license number 337565 under the Corporations Act 2001. S&P Global Ratings' credit ratings and related research are not intended for and must not be distributed to any person in Australia other than a wholesale client (as defined in Chapter 7 of the Corporations Act).
| Primary Credit Analyst: | Craig A Bennett, Melbourne (61) 3-9631-2197; craig.bennett@spglobal.com |
| Secondary Contact: | Angela Zhou, Melbourne + 61.2.9255.9841; angela.zhou@spglobal.com |
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