It is understood that the Australian Prudential Regulation Authority (APRA) is doing “focused work” on the retail disability income insurance market over concerns that the loss-making income-protection policies are dragging down the profitability of the entire insurance industry.
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APRA data showed that for the year ended June 30 2017, individual disability income insurance across the sector incurred a $377m after-tax loss, up from the previous year's $360m.
The regulator is understood to be gathering detailed information from insurers and industry bodies on what accounted for such heavy losses and whether the issue is being sufficiently addressed, with APRA's Geoff Summerhayes expected to oversee the matter, The Australian Financial Review reported.
Retail life insurers usually make up for continual losses in disability insurance from their lump-sum business. But for 2017, the aggregate lump-sum business was down from last year's after-tax profit of $914m to $324m. This means the retail life insurance industry made a combined loss of $53m for the year, and for the first time was unable to offset losses on individual disability insurance, the report said.
"APRA statistics show the life insurance industry has lost $1.5 billion over the last four years on retail income protection policies,” Rice Warner chief executive Michael Rice told AFR. “This has occurred during a period of stable economic and employment conditions – conditions under which these policies ought to be profitable."
Industry experts told AFR that the rise in mental health claims has resulted to sharp losses, which in turn, led to 30% rise in premiums.
“Income protection is cyclical, in that every seven years it becomes unprofitable,” said Mark Kachor, managing director of insurance industry researcher DEXX&R. “But mental health is an additional cause of claim that is much more common today than it was 20 years ago.”
Rice said that not only was mental illness leading to higher claims, the ailments may also have a longer recovery period.
"While this has led to a few years of sharp premium increases, there is no sign that the portfolios are becoming more profitable, or that losses on disability income have been stemmed," he told AFR.
Kachor said companies such as AMP would have a greater proportion of the losses, while others such as MLC Life that had revised their claims prices, repriced, and rolled out new products would have made more profit.
"Some companies do have a profitable income protection portfolio and have done the hard yards in the last three years and are now going to capitalise on that position,” he said. “The APRA figures are an aggregate for the industry and it's not like each one is proportionally that bad."
Despite APRA's ongoing review, Rice said there needs to be a “catalyst” to break the cycle of generous, unsustainable payouts.
"In recent years, insurers have been in an arms race to release more options and cover variants to the market,” he told AFR. “The aim has been to meet as many potential customers' need[s] as possible. However, this has led to product definitions becoming more lenient and proliferation of benefits without the necessary adjustments to product pricing."
Kachor said it's not possible for insurers to make the terms applicable to all their in-force business “less generous.” They can, however, price the business they have in force “to a point where it is possible.”
According to industry commentators, instead of simply “writing a cheque,” insurers will have to put more money into ancillary services, including physiotherapy and mental health services, in order to help their customers get back to work, AFR reported.
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