In response to ongoing heavy losses in respect of individual disability income insurance (DII), the Australian Prudential Regulation Authority (APRA) has launched a series of measures requiring life insurers to address flaws in product design and pricing.
In a letter to the industry, the prudential regulator said life companies collectively lost around $3.4 billion over the past five years through the sale of DII to individuals (rather than through superannuation). Further losses of $1 billion have been reported to APRA since the regulator requested the industry to address the problems in May.
Geoff Summerhayes, APRA executive board member, said there is now a genuine risk insurers may start withdrawing from the market, with at least one major reinsurer indicating it was no longer prepared to reinsure individual DII.
“In a drive for market share, life companies have been keeping premiums at unsustainably low levels and designing policies with excessively generous features and terms that, in some cases, provide a financial disincentive for policyholders to return to work,” Summerhayes said. “Insurers know what the problems are, but the fear of first-mover disadvantage has proven to be an insurmountable barrier to them making the necessary changes. By introducing this package of measures, APRA is forcing the industry to better manage the risks associated with DII and to address unsustainable product design features – or face additional financial penalties.”
To address the urgent issue, APRA imposed an upfront capital requirement on all individual DII providers, effective from March 31. The capital requirement will remain in place until individual insurers can demonstrate they have taken adequate and timely steps to address APRA’s sustainability concerns. Individual insurers who continue to fail to meet APRA’s expectations will be issued directions or have their licence conditions changed.
APRA also expects life companies to better manage riskier product features, including by:
- ensuring DII benefits do not exceed the policyholder’s income at the time of claim, and ceasing the sale of agreed value policies;
- avoiding offering DII policies with fixed terms and conditions of more than five years; and
- ensuring effective controls are in place to manage the risks associated with longer benefit periods.
APRA said it will also launch an individual DII data collection mid-next year to help life companies gain better insights into market trends and developments. The data collection will also help APRA monitor life companies’ progress in meeting APRA’s expectations.
“The ultimate outcome should be more financially resilient life companies and more sustainable products for policyholders,” Summerhayes said. “Unless insurers stop losing hundreds of millions of dollars each year, it’s only a matter of time until individual DII – and the protection it provides – is no longer available at all.”
In an email to Insurance Business, Zurich Life & Investments said it “welcomes efforts made to ensure the long term sustainability of a product that is vital for protecting the financial security of Australians.” The company also said it “will comply with all regulatory changes and will review and consider all recommendations made.”