Legacy life insurance products should be rationalised across the life insurance sector in an effort to improve the operational risk to insurers and offer greater efficiency and lower costs to consumers, according to the Australian Prudential Regulation Authority (APRA).
In its submission to the Inquiry into the Scrutiny of Financial Advice – Life Insurance, being conducted by the Senate Economics Committee, APRA stated legacy products and the systems required to maintain them had been a drain on the life insurance sector for a number of years.
“Over the past decade, there has been little improvement in overall industry operating efficiency despite its increasing use of technology to administer, underwrite and distribute business,” APRA stated in its submission.
“This could be partially attributed to a need to maintain large books of legacy business, often on earlier generation systems, that can be expensive to administer and difficult to rationalise.”
APRA stated that legacy products had grown due to the longevity of insurance policies while financial, legal and social conditions had changed, alongside a significant level of consolidation within the life insurance sector over the past 20 years leading to duplicated and outdated products.
It also stated that while new products are introduced on a regular basis to match consumer demand and changed market conditions “these legacy policies must continue to be administered in accordance with the original contract terms”.
APRA said insurers were restricted from closing legacy products or moving consumers to newer products due to complex legal, consumer and tax issues and it would remain difficult to rationalise legacy products in the absence of a legislative mechanism as each policyholder would need to consent to any changes.
However, the regulator suggested the introduction of a ‘no disadvantage test’ for consumers where legacy products were rationalised stating the Federal Government had already worked with the life insurance sector to develop a mechanism to facilitate product rationalisation but had yet to finalise and implemented it.
“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,” APRA stated.
“From the consumer perspective, it has the potential to improving consumer outcomes by updating definitions, improving efficiency and administration, and lowering costs.”
