May 3, 2019
The Australian Prudential Regulatory Authority has sent letters to insurers in which it calls on them to urgently address concerns it has with the sustainability of individual disability income insurance.
The regulator says its concern relates specifically to individually-sold income protection business, rather than group income protection, due to the ongoing poor performance of individual DII.
In registering its concern, APRA notes the industry has collectively lost $2.5 billion through this product offering over the past five years, with no signs of improvement.
In its letter, APRA details its concerns, which it says were identified by a recent thematic review of individual DII and has issued a series of requirements for life companies to address those concerns.
The review examined the eight largest providers of individual DII, representing more than 90 percent of market share, where APRA says it found shortcomings with insurers’:
- Strategy and risk governance
- Pricing and product design
APRA also noted it found there was inadequate data and resourcing within the companies dedicated to dealing with DII and its related issues.
In a critical assessment of the current issues surrounding DII product sustainability, APRA Executive Board Member, Geoff Summerhayes, said most life companies have long been aware of the issues, but their efforts to address them have so far been inadequate:
…life companies have focused on attracting policyholders through pricing and product features that are not sustainable
“In a highly competitive environment, life companies have focused on attracting policyholders through pricing and product features that are not sustainable. The result has been ongoing losses and a failure to deliver a satisfactory customer experience,” he said, adding:
“Unless these adverse trends are reversed, there is a risk some life companies will ultimately exit the market for DII, worsening consumer outcomes through reduced competition, accessibility and affordability.”
APRA has given life companies eight weeks to start taking a range of steps in response to its concerns, including formulating a strategy to address the issues identified by the thematic review, and reviewing DII product design and pricing practices to enhance its sustainability.
In seeking to address a number of factors the regulator says are impeding life companies’ ability to improve the performance and sustainability within the individual DII market, APRA has identified four key themes where it says greater attention and action are needed by insurers:
Strategy and risk governance
- Formulating and executing a co-ordinated strategy with a clearly defined long-term target state. The board needs to own and drive that strategy with appropriate level of oversight and challenge.
- Clearly articulating risk appetites that are supported by risk and performance metrics at a product level, in this instance, specifically in relation to individual DII.
- Lifting the capacity and capability of risk functions to provide a sufficient level of oversight and challenge on individual DII associated risk matters.
Pricing and product design
- Greater consideration of, and transparency around, risks associated with individual DII related pricing decisions and new product developments.
- Ensuring that product designs adhere robustly to the principles of insurability.
- Improving the quality, quantity and timeliness of data.
- Proactively contributing to the industry experience study and collaborating with APRA’s initiatives to consider options to improve the industry experience data.
- Proactively ensuring resourcing and skills in key disciplines are adequate for the workload and complexity associated with individual DII business
Mr Summerhayes said life companies that failed to promptly and effectively meet APRA’s expectations would face consequences.
Click here to access APRA’s open letter to all life insurers and friendly societies.