Disability income insurance (DII), also known as income protection insurance, provides replacement income to policyholders when they are unable to work due to illness or injury. APRA has been concerned about DII sold to individuals (rather than provided through superannuation in the form of group insurance) due to its ongoing poor performance. The industry has collectively lost $2.5 billion through this product offering over the past five years, with no signs of improvement.
In a letter to industry published today, APRA outlined the concerns identified by a recent thematic review of individual DII, and issued a series of requirements for life companies to address those concerns.
The review examined the eight largest providers of individual DII, representing more than 90 per cent of market share. It found shortcomings with insurers’ strategy and risk governance, and pricing and product design, as well as inadequate data and resourcing dedicated to dealing with DII.
An earlier phase of the work also involved APRA engaging with reinsurers and communicating its observations to them in mid-2018.
APRA Executive Board Member Geoff Summerhayes said most life companies have long been aware of the issues, but their efforts to address them have so far been inadequate.
“In a highly competitive environment, life companies have focused on attracting policyholders through pricing and product features that are not sustainable. The result has been ongoing losses and a failure to deliver a satisfactory customer experience,” Mr Summerhayes said.
“Unless these adverse trends are reversed, there is a risk some life companies will ultimately exit the market for DII, worsening consumer outcomes through reduced competition, accessibility and affordability.”
Today’s letter sets a deadline for life insurers to start taking a range of steps in response to APRA’s concerns, including formulating a strategy to address the issues identified by the thematic review, and reviewing DII product design and pricing practices to enhance its sustainability.
Mr Summerhayes said life companies that failed to promptly and effectively meet APRA’s expectations would face consequences.
“The life companies involved in the thematic review have eight weeks to provide APRA with a detailed outline of how they intend to fulfil these requirements. If either their action plan or progress implementing it is inadequate, we will step up our supervisory intensity of that life company and consider imposing an increase in its minimum capital requirements,”
he said.
“Other life companies involved in the provision of DII products must also take action by submitting a self-assessment against APRA’s findings. Furthermore, we expect all life companies to examine whether the same types of issues exist in their other product groups that may be experiencing challenges, such as total and permanent disability insurance.”
“There is no quick fix for this complex problem, especially for the legacy business, but with strong, proactive leadership at an industry level, insurers can make the changes needed to regain community trust and restore DII to a sustainable footing. A profitable industry that delivers policies of real value is ultimately in the interests of both life companies and their policyholders.”
A copy of the letter is available on the APRA website at:
