Legacy Products Left Behind by Insurers

The Australian Prudential Regulatory Authority (APRA) has called on life insurers to tackle the long tail of legacy products in existence by adequately investing in systems and process that can administer these policies instead of waiting for a legislative solution.

The regulator claimed life insurers had not invested sufficiently into these systems leading to increased costs and complexity for both policy holders and insurers.

The claim was made as part of APRA’s submission to the Parliamentary Joint Committee on Corporations and Financial Services – Inquiry into the life insurance industry in which it called for industry to act first but also for the Government to provide legislative solutions in line with recommendations from the Financial System Inquiry.

“In APRA’s view, there is a great deal more that industry can do in relation to legacy products, without waiting for a legislative solution. In particular, life insurers need robust systems and processes capable of fairly and accurately administering their books of legacy business and have not always invested enough in these systems and processes,” the submission stated.

“there is a great deal more that industry can do in relation to legacy products, without waiting for a legislative solution”

“APRA will continue to increase the pressure on insurers to invest more in this area, so that their systems and processes are more capable of meeting community and policyholder expectations,” APRA said.

APRA was also critical of the lack of data life insurers held on legacy claims and policies stating there was no reliable information that could be used by decision makers to formulate solutions and policies.

“APRA identified that collecting comprehensive and accurate data to manage and measure its portfolio is one of the basic needs of an insurer. While we understand that some insurers have recently begun long-term projects to upgrade systems, many insurers will still find this a challenge,” APRA stated.

“A lack of robust, reliable data, together with old systems and software, imposes significant constraints on the ability of an insurer to manage its business efficiently and evolve to meet future challenges,” the regulator added.

APRA did note that work had been done toward creating a legislative solution to legacy products but this had stalled since 2010, despite the FSI Final Report recommending an appropriate mechanism for rationalising legacy products and this recommendation having been accepted by the Government

“APRA continues to strongly support the need to comprehensively address this issue. From the perspective of the product provider, it would help mitigate the increasing operational risk that such products create, as well as improve the industry’s operational efficiency. From the consumer perspective, it has the potential to improving consumer outcomes by updating definitions, improving efficiency and administration, and lowering costs.”

  • Nick Hatherly

    Legacy products are a massive problem. The insurers haven’t lived up to their promise to advisers and our clients. They have left products behind and closed them off to all sorts of alterations This then forces the healthy lives into their new products and leaves the riskier clients behind in the old products where, as far as i’m concerned, they are discriminated against. Insurers gave a life long promise to the clients when they insured them – they should honour it.

    • JM

      One difficulty with legacy products is that life companies are not able to make any changes to products that are detrimental to any policyholder [unless such policyholders agree]. So by way of example, if a medical definition becomes out of date, the insurer will have to ensure that a new replacement definition is at least no worse for every policyholder. Which then means a more generous definition. The life company is then not legally allowed to increase premiums to cover that extra cost from the passing back of a more generous definition. So, a real disincentive exists to make the change.