While the sector's future profitability was positive - as return on equity remained above 10% over the medium term - it would weaken on toughening market conditions and poorer underwriting performance, S&P said in a report.
"We view market growth prospects as negative. A combination of soft economic activity, considering tight household income and constrained expenditure within the corporate sector, will constrain overall P/C [property and casualty] gross premium growth," S&P said in its Insurance Industry and Country Risk Assessment: SA Property/Casualty report.
At 2,7%, SA's short-term insurance penetration was relatively high compared with global peer markets.
"Nevertheless, we believe that negative real rates of growth will emerge for most representative lines of business. We expect only select and niche lines of business to be resilient, with either small increases or flat premium adjustments."
The ratings agency assessed country risk as "moderate" - two levels below the highest risk category.
"Our assessment of moderate country risk reflects the economic risks stemming from weak economic growth, relative to that of peers in similar wealth categories, wide income disparities and infrastructure gaps, modest financial system risk, and an acceptable rule of law."
In line with the World Bank, S&P estimates SA's nominal GDP per capita to be about 5,759. Real GDP per capita, which contracted 0,5% in 2015, will decline to $4,900 in 2016.
Industry risk was assessed as "intermediate" - two levels above the lowest risk category.
Heightened regulation had increased barriers to entry, but SA's nonlife insurance market was technically sophisticated and strongly competitive, S&P said. "The industry structure is oligopolistic in structure, with the top five insurance groups combined commanding less than half of all premiums written.
"We anticipate some consolidation in the industry, amid intensifying competitive pressures, over the medium term."
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