The Australian Prudential Regulation Authority (APRA) as published its Annual Report for 2020-21, which includes a broad assessment of general, life and private health insurance.
General insurance has a coverage ratio of 1.7 times the minimum requirement as of June 30, benefitting from the capital raisings from insurers which has offset the need for additional provisions for business interruption insurance.
"Business interruption insurance proved problematic for the general insurance industry," the report said. "After the SARS outbreak in 2003, insurers sought to eliminate their exposure to pandemics by including exclusions in their policies. However, imprecision in policy wording has resulted in legal challenges which could lead to insurers having to pay substantial unanticipated claims.”
The industry also took a hit from more weather calamities than anticipated. It doesn’t help that rising premiums and reduced capacity in some product lines have made insurance much more unaffordable to the average citizen.
Meanwhile, life insurance remained resilient from a capital perspective with a coverage ratio of 1.9 times the minimum requirement as of June 30. Special circumstances prompted APRA to identify potential vulnerabilities in this industry, but found nothing too alarming related to the pandemic.
Upon conducting stress tests on the COVID-19 situation, APRA claimed that life insurers and reinsurers were more than capable to withstand a severe economic downturn and adhere to standing commitments.
Instead, the industry “continues to be challenged by product sustainability issues, with substantial losses incurred in individual disability income insurance and recent losses in insurance offered through superannuation and corporate schemes.”
On the other hand, private health insurance was in a sound capital position with a coverage ratio of 1.6 times.
In recent years, APRA has voiced concerns over the number of people opting out of health insurance, and the pause on premium increases and elective surgeries in the midst of the pandemic has done nothing to slow the downward trajectory of private health.
“The industry provided financial relief to policyholders by delaying premium increases and allowing policyholders to suspend their policies for a period without any restrictions or limitations to future benefits,” the report said. “[However] as treatments were inaccessible, hospital and general benefits paid to policyholders were consequently reduced.”
In June 2020, APRA issued a deferred claims liability (DCL) to policyholders who had treatments postponed or cancelled, but later relaxed this provision to give insurers more room to determine the value of the DCL.