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.
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.