The corporate regulator has given life companies another 12 months to find a workable solution around applying maximum five-year terms for income protection insurance contracts.
In an open letter sent to product manufacturers last week, APRA was effectively recognising feedback it has received around the challenges manufacturers say they are facing in implementing the regulator’s previously-articulated policy contract term measure (see: APRA Cracks Whip to Stem DII Losses).
While the regulator’s letter to the product manufacturers last week only refers to its ‘policy contract term measure’ without explicitly referencing the five-year maximum term it stipulated in its October 2020 directive, this is the measure with which insurers appear to have experienced the greatest difficulty in finding a way to implement.
…the industry is unlikely to be able to develop viable solutions for implementing the measure by …1 October 2021
In what it describes as its updated position, APRA says, in conjunction with ASIC, it has been “…actively engaging with the FSC and other industry stakeholders on the implementation of the policy contract term measure.” It notes it has become clear “…the industry is unlikely to be able to develop viable solutions for implementing the measure by APRA’s previously communicated deadline of 1 October 2021.”
The regulator adds it appreciates life companies have considered various options, but to date haven’t settled on solutions that satisfy both the legal and operational constraints required without triggering unintended adverse consequences for consumers:
“APRA acknowledges the challenges associated with implementing the policy contract term measure, as well as the industry’s efforts to date in working to formulate viable solutions.”
Without the policy contract term measure, it is unlikely there will be a change to the current practice that effectively locks in terms and conditions for extended periods of time…
The regulator notes it considers its IP policy contract term measure to be an important mechanism to manage the risks associated with long contract terms. It says “Without the policy contract term measure, it is unlikely there will be a change to the current practice that effectively locks in terms and conditions for extended periods of time, leaving premium changes as the primary (or only) lever to deal with the impact of external changes on IDII sustainability.”
Mindful of triggering unintended adverse consequences for consumers, the regulator has therefore decided to postpone the implementation of the measure by a year to 1 October 2022.
While allowing more time for insurers to address the issue of IP policy contract terms, APRA adds in its letter that it expects all of the other measures in relation to individual disability income insurance, as outlined in its 30 September 2020 letter, will take effect – as scheduled – from 1 October 2021.