Group Risk Premium Rises Won’t Solve Sustainability Problems

The Australian Prudential Regulation Authority (APRA) has hit out at group insurers for the recent spate of premium increases, saying the approach does not address the structural problems which have caused the industry’s sustainability issues.

Commenting on the status of the life insurance industry in its latest Insight report, APRA said group risk insurers had ignored warnings about the impact of soft underwriting practices and enhanced benefits, resulting in the current profitability crisis.

In order to redress losses, affected life insurers have lifted premiums sharply, a measure that APRA says has not only led to adverse outcomes for superannuation fund members, but one which also fails to address the structural problems that caused the situation.

The regulator noted the following factors which have contributed to poor profitability in recent years:

• Record amounts of default cover being made available without underwriting
• A weakening of underwriting controls for optional levels of cover, and automatic acceptance of incremental increases in cover without the need for medical evidence
• The growth in complexity of TPD benefit definitions, resulting in some types of claims being admitted that arguably may not have been intended to be covered by the policy wording
• Changing community attitudes to mental health, leading to a higher prevalence of claims for stress-related illness
• More claims now being subject to the involvement of lawyers on behalf of claimants
• Superannuation fund member awareness of life insurance cover provided through superannuation, leading to a higher propensity to claim
• Failure to match the greater complexity of the claims environment with development of an adequate pool of experienced claims staff

APRA said it is now coordinating closely with the life insurance and superannuation sectors to resolve the strains in the group risk market. The regulator has also pressured insurers to improve the availability of detailed, accurate and timely insurance reporting.

‘Throughout, APRA’s message to life insurers and reinsurers has been that boards must ensure they understand adequately the risks they incur in group insurance business, and that risk management processes are adequate for the uncertainties in this line of business,’ the report said.