APRA Sets New Course for IP Sustainability

In a momentous development, APRA has imposed a prescriptive set of changes on life companies designed to revive the flagging sustainability of individual income protection insurance products in Australia.

APRA’s Geoff Summerhayes …life companies have been keeping premiums at unsustainably low levels

In an open letter to life insurers and friendly societies, released earlier this week, the corporate regulator didn’t mince its words in outlining what it deems an intervention to address the sustainability plight currently plaguing this critically-important protection offer.

These changes will probably impact every individual income protection insurance advice conversation advisers will have with their clients.

Issued under the threat of sanctions if its directives are not adopted, the regulator’s prescription for insurers in ‘managing riskier product features’ includes the total removal of agreed value contracts and limiting the maximum duration of individual DII policies to five years. It states:

  • With effect from 31 March 2020, APRA expects that life companies discontinue writing IDII contracts where insurance benefits are not based on income at time of claim, including agreed value (and endorsed agreed value) contracts
  • With effect from 1 July 2021, APRA expects that income at risk for all new IDII contracts be based on annual earnings at the time of claim, not older than 12 months
  • With effect from 1 July 2021, APRA expects that life companies will only offer new IDII contracts where:
    • The initial contract is for a term not exceeding 5 years
    • There is a right for the policy owner to elect to renew the contract for further periods (not exceeding 5 years) without a medical review on the terms and conditions applicable to new contracts that are then on offer by the life company. Changes to occupation and financial circumstances should be considered on renewal.

The implications and consequences of this action by APRA impact every stakeholder in the life insurance advice value chain – from reinsurers to retail insurers, licensees, advisers and their clients.

Warning there is now a genuine risk that insurers may start withdrawing fro the individual DII market, APRA Executive Board Member, Geoff Summerhayes, provided this perspective around current market practices and the issues associated with ‘first-mover’ initiatives:

…the fear of first-mover disadvantage has proven to be an insurmountable barrier

“In a drive for market share, life companies have been keeping premiums at unsustainably low levels and designing policies with excessively generous features and terms that, in some cases, provide a financial disincentive for policyholders to return to work.

“Insurers know what the problems are, but the fear of first-mover disadvantage has proven to be an insurmountable barrier to them making the necessary changes. By introducing this package of measures, APRA is forcing the industry to better manage the risks associated with DII and to address unsustainable product design features – or face additional financial penalties.”

The regulator is imposing other significant measures and controls on insurers which which include the imposition of capital charges against retail insurers until such time as they provide evidence they are complying with APRA’s ‘recommendations’, as well as new IP data collection requirements.

Advisers can click here to read APRA’s open letter to all life insurers and friendly societies on Sustainability Measures for Individual Disability Income Insurance.

  • Rob

    In the above did you see the word ” Consult.” No unfortunately. Again a case of stand over decision making without consultation. After all insurers are publicly listed, or otherwise private businesses that protect the financial lives of their customers. They alone know the costing dangers of being to generous with benefits. After all it is a competitive market. Why not ask the businesses themselves for ways of improving profitability. I am sure the collective insurers would gladly explore ways of improving bottom lines, other than taking away benefits to 65. Is it in the “clients best interest” that they will no longer be covered to age 65. Why not make other changes, rather than denying unique coverage to 65. Will all insurers now be just vanilla, without other flavours. What will set them apart? Maybe they will just exit this class of business, with the public purse to foot the disability, illness bill. How near sighted again has this government been.

  • Ken

    This has been coming for a long time ! I have spoken about the same possible changes for many years so to be honest I’m not surprised
    However I agree with Rob where is the round table sit down with insurers and advisers to get their ideas on what changes are required and what may actually work
    For example Income at claim time is all well and good if you are a salaried employee without any major changes in your income from month to month or year to year but self employed people face a whole different issue in relation to periods of time without work during downturns in the economy some contractors enduring at times months between large contract arrangments what about an extended and well overdue holiday that they dont get paid for let alone with leave loading. What about premiums ? Will 5 year benefit policies have Age 65 premiums in an attempt to clawback losses?
    Once again APRA like to many other government agencies has hit the “fly with a shovel” in their attempt to cover everything
    It’s just not that easy ! Come on all Insurance Companies Associations APRA and advisers let’s pull together on this or it will overcompensate for an industry already grappling with over regulation and ridiculous Fasea education requirements
    Cut out commissions for policies submitted by others who are not employees and that’s it !! Amargedon will have arrived for the retail risk business.

  • alex

    History has repeatedly shown us that as soon as you get publicly over-funded regulators, bureaucrats and politicians involved, the outcome will be an even greater mess.

    • Concerned

      Absolutely Alex! ASIC, APRA, FSC, AFCA, FASEA – and they wonder why Risk New Business is down and why there will be a mass exoduc of advisers in the next few years!

  • Leighroy

    Hey Alex, Anon, Ken., Rob, Old Risky. At long last someone is moving to fix the IP problem, and you guys just want to keep crying about legislative change and commission reductions. 25 years ago it was clear to blind Freddy that all the bells and whistles offered under IP contracts would come back to bite in future. If something is not done, there will not be an IP contract available at all, (so no commission available) so best it is tackled now.

  • JM

    APRA has been engaging with life companies since 2017 on this issue. This is not a bolt out of the blue.