The Australian Prudential Regulation Authority (APRA) is set to resume its intervention into the life insurance market to stem ongoing heavy losses in respect of individual disability income insurance (IDII).
APRA wrote to life insurers and friendly societies in December last year to announce a range of measures – including capital charges – to address flaws in IDII product design and pricing that had seen the industry lose around $3.4 billion over the past five years. The program of work was put on hold in March 2020 to enable life companies to focus on responding to the pandemic.
Since the December letter, life insurers and friendly societies have lost a further $1.4 billion through the sale of IDII, which is also known as income protection insurance. Consequently, APRA has concluded that the industry can wait no longer to start seriously addressing concerns over IDII that threaten the product’s long-term availability in Australia.
The authority has advised that from 1 October 2020, IDII providers will be subject to upfront capital penalties until APRA is assured they have taken adequate and timely steps to address sustainability concerns.
Specifically, APRA requires them to implement a number of measures designed to better manage riskier product features, including:
- ensuring IDII benefits do not exceed the policyholder’s income at the time of claim, and cease the sale of Agreed Value policies;
- avoiding offering IDII policies with fixed terms and conditions of more than five years; and
- ensuring effective controls are in place to manage the risks associated with longer benefit periods.
