APRA Cracks Whip To Stem Insurance Losses


APRA is to resume its intervention of the life insurance market in Australia “…to stem ongoing heavy losses in respect of individual disability income insurance” – otherwise known as IDII.

In a letter to life insurers, the Australian regulator says that IDII providers will be subject to upfront capital penalties “…until APRA is assured they have taken adequate and timely steps to address sustainability concerns”, the authority says in a statement.

The statement explains that APRA wrote to life insurers and friendly societies in December last year to announce a range of measures – including capital charges – to address flaws in IDII product design and pricing that had seen the industry lose around AU$3.4 billion over the past five years (see: APRA Sets New Course for IP Sustainability).

Geoff Summerhayes …it’s now up to life companies to rise to the challenge of restoring IDII to a sustainable footing…

The programme of work was put on hold in March 2020 to enable life companies to focus on responding to the pandemic.

It says that since the December letter, life insurers and friendly societies have lost a further $1.4 billion through the sale of IDII.

“Consequently, APRA has concluded that the industry can wait no longer to start seriously addressing concerns over IDII that threaten the product’s long-term availability in Australia,” it says.

Specifically, APRA requires insurers to implement a number of measures designed to better manage riskier product features, including:

  • Ensuring IDII benefits do not exceed the policyholder’s income at the time of claim, and cease the sale of Agreed Value policies
  • Avoiding offering IDII policies with fixed terms and conditions of more than five years
  • Ensuring effective controls are in place to manage the risks associated with longer benefit periods

The statement adds that APRA has also asked life companies to consider and apply these underlying principles to their other insurance products.

APRA Executive Board Member Geoff Summerhayes says that IDII plays a valuable role in providing replacement income to policyholders when they are unable to work due to illness or injury.

“APRA wants to ensure it remains available to Australians who need it, but that won’t happen if life companies continue to haemorrhage money through the sale of IDII.”

…the pandemic may further exacerbate the problems with this product, so decisive action can no longer be delayed…

He says that APRA’s assessment is that the pandemic may further exacerbate the problems with the product, so decisive action can no longer be delayed.

“APRA has delivered a framework and financial incentives to fix this complex issue; it’s now up to life companies to rise to the challenge of restoring IDII to a sustainable footing,” Summerhayes adds.

Click here for a copy of the letter to insurers: Final individual disability income insurance sustainability measures.

A New Generation of IP Cover

Sally Loane…the  industry is committed to developing new, more affordable types of IP cover…

Meanwhile, the FSC has thrown its support behind the framework proposed by APRA and the Actuaries Institute consultation on governance for individual IP, saying it expects a new generation of income protection products to be available in 2021.

FSC CEO Sally Loane says in a statement that according to a recent KMPG report on international comparisons of IP products, Australia offers the most generous and comprehensive IP policies of any developed market.

She says this has exacerbated the recent increase in the incidence and duration of claims, including for mental health conditions.

“We know there’s a direct link between increasing claims costs and increasing premiums, which is why Australians have seen rising income protection premiums,” Loane says.

She says that to address this, the life insurance industry is committed to developing new, more affordable types of income protection cover to give Australians more choice.

She adds that APRA has set out its roadmap and that the life insurance industry is ready to design a new generation of products that will aim to deliver the three “A’s” of Availability, Affordability and Assurance (that the life company will there when customer needs to claim).