In December 2019, the Australian Prudential Regulation Authority (APRA), the regulator for life insurers in Australia, launched an intervention into the insurance market in response to substantial ongoing losses on income protection insurance. APRA proposed a series of measures requiring insurers to address policy design and pricing to improve the sustainability of the income protection market.
Summary of key changes:
If implemented, from 31 March 2020, Agreed Value income protection insurance policies will no longer be available for new policies. Agreed Value refers to the locking in of the monthly insurance benefit without needing to prove what you were earning at the time of claiming.
By July 2021, insurers are expected to no longer offer some other benefits, with the biggest changes being:
- Policies will no longer be “guaranteed renewable”. As a result, every five years the insurer can revise the terms and conditions of a policy and re-assess the insured’s income position.
- Policies with long term benefit periods may have controls in place to limit the ongoing claim.
- Your insured income is to be based on your annual income at the time you make a claim.
- Limits of 100% of income replacement payments can be made in the first six months and 75% thereafter, with a total limit of $30,000 per month.
The proposed changes are subject to a consultation process between APRA and the industry so there may be variations. At present, we know of the Agreed Value changes beginning 31 March 2020, but we expect that insurers will begin implementing changes for new policies over the coming year.
Further help
You can read the entire APRA media release below. If you don’t have income protection insurance, you should obtain further advice about the suitability of such products from a qualified financial adviser before these changes are introduced. If you do have cover, you should review your policy to ensure it provides the protection you need.
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Media Release: APRA intervenes to improve sustainability of individual disability income insurance
The Australian Prudential Regulation Authority (APRA) has launched an intervention into the life insurance market in response to ongoing heavy losses in respect of individual disability income insurance (DII).
In a letter to industry today, APRA announced a series of measures, including capital charges, that will require life insurers and friendly societies to address flaws in product design and pricing that are contributing to unsustainable practices.
Life companies have collectively lost around $3.4 billion over the past five years through the sale of DII to individuals (rather than through superannuation). APRA wrote to the industry in May requesting urgent action to address the problems. Since then, insurers have reported further losses of $1 billion, prompting APRA to escalate its response.
With at least one major reinsurer indicating it was no longer prepared to reinsure individual DII, APRA Executive Board Member Geoff Summerhayes said there is now a genuine risk insurers may start withdrawing from the market.
“Disability income insurance plays a vital role in providing replacement income to policyholders when they are unable to work due to illness or injury,” Mr Summerhayes said.
“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.”
To underline the urgency of the situation, APRA has decided to impose an upfront capital requirement on all individual DII providers, effective from 31 March 2020. The capital requirement will remain in place until individual insurers can demonstrate they have taken adequate and timely steps to address APRA’s sustainability concerns. In instances where individual insurers continue to fail to meet APRA’s expectations, APRA may also issue directions or make changes to licence conditions.
APRA also expects life companies to better manage riskier product features, including by:
- ensuring DII benefits do not exceed the policyholder’s income at the time of claim, and ceasing the sale of Agreed Value policies;
- avoiding offering DII 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.
To further assist life companies gain better insights into market trends and developments, APRA will introduce an individual DII data collection. This data collection, due to be released mid-next year, will also help APRA to monitor life companies’ progress in meeting APRA’s expectations.
Mr Summerhayes said: “The ultimate outcome should be more financially resilient life companies and more sustainable products for policyholders. Unless insurers stop losing hundreds of millions of dollars each year, it’s only a matter of time until individual DII – and the protection it provides – is no longer available at all.”
© Australian Prudential Regulation Authority [2020]
