The recent rise in group insurance premiums is not enough to reassure the Australian Prudential Regulation Authority that the life insurance industry is effectively mitigating its sustainability risks, the regulator has warned.
As we reported last week, APRA recently released its 2013 Insights report, which provides an update on the key risks facing the life insurance industry (see: APRA Weighs in on Sustainability Debate). The regulator said its concerns over the long-term sustainability of the insurance industry extended beyond the retail and direct insurance markets, to the trends developing in the group sector.
…margins are too finely tuned or optimistic to withstand even reasonably expected deviations in claims experience
Specifically, APRA said it had been observing poor practices in the tendering and pricing of large group life insurance policies over a number of years, saying margins were too finely tuned or optimistic to withstand even reasonably expected deviations in claims experience. The group insurance market is now feeling the effects of a significant increase in both claims numbers and claims duration, which in turn has directly impacted insurers’ profitability.
According to APRA, the industry has attributed the deterioration in claims experience to a variety of causes, including:
- Increased stress in the general populace as a result of the global financial crisis and declining job market
- Increased awareness of mental health problems in the community
APRA said it had also observed that the deterioration happened following an earlier period where benefits and claims definitions were regularly improved and underwriting rules, such as automatic acceptance limits and eligibility terms, were relaxed.
‘Consumers too have an increasing awareness of the availability of substantial insurance benefits offered by superannuation funds without evidence of health,’ APRA said in its report. This contributed to the current issues being faced by the sector, the regulator said, because changes in that earlier period all too often went through without appropriate adjustments to prices. They also occurred during a period when prices were seen to regularly reduce.
Consumers too have an increasing awareness of the availability of substantial insurance benefits offered by superannuation funds
APRA said it had more recently observed a turnaround in sentiment and priorities from group insurers, with premium rates increasing substantially over the past 12 months. Despite this action, APRA warned it remained concerned about industry practices, and promised to increase the intensity of its supervision in this area.
The regulator also said that while insurers had been able to offer super fund trustees changing benefit designs and improved customer service to offset concerns from members about increased rates, this strategy was likely to be ‘nearing exhaustion’. ‘It now seems that trustees are redirecting their attention to the impact that the cost of insurance premiums are having on members’ retirement benefits, particularly as prices increase,’ the report stated.
To address these issues, APRA said it had been urging life insurers and superannuation trustees to improve the quality of member and claims data, including data made available during a group insurance tender. In July 2013, APRA introduced specific requirements and guidance for superannuation trustees in this regard and said it believed that the life insurance industry had embraced this effort.
APRA also recently issued draft guidance to life insurers on what it considers good practice for tendering for group insurance business, improving the quality of the claims data being kept in relation to insurance through superannuation and the provision of that data in the tendering process (see: APRA Focus on Group Insurance).
APRA’s Insights report also provided commentary on the issues surrounding the retail market. Click here to read more.
