In a letter to industry, 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.
APRA noted that life companies have collectively lost around $3.4 billion over the past five years through the sale of DI insurance to individuals (rather than through superannuation).
APRA wrote to the industry in May requesting urgent action to address the problems. It escalated its response after insurers reported further losses of $1 billion since then.
APRA said it 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 added that it may also issue directions or make changes to licence conditions.
With at least one major reinsurer indicating it was no longer prepared to reinsure individual DI insurance, 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 DI insurance and to address unsustainable product design features – or face additional financial penalties.”
APRA said it also expects life companies to better manage riskier product features, including by:
- ensuring DI insurance benefits do not exceed the policyholder’s income at the time of claim, and ceasing the sale of agreed value policies;
- avoiding offering DI insurance 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 DI insurance 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.
“The ultimate outcome should be more financially resilient life companies and more sustainable products for policyholders,” Mr Summerhayes said.
“Unless insurers stop losing hundreds of millions of dollars each year, it’s only a matter of time until individual DI insurance – and the protection it provides – is no longer available at all.”
I wonder how this will play out in the best interest space?
If industry is losing $1b a year, something has to change. Given losses have been occurring for over a decade and the life companies could not sort this out themselves, the regulator has stepped in to try to save industry from themselves. Bold move, but I for one think it’s well overdue.
Nothing is easy about this issue. Now that the source of new business has been exterminated, the whole game has changed. The rating and benefits of the policies in force was set up based upon a successful sales system of bringing in new fresh premiums. I think that the the only way to fix the issue is for the insurers to make capital offers to existing claimants. The biggest problem to such a settlement will most likely be tax. The problem is too far gone to fix. Other policyholders who have existing contracts in place, but have health issues, will have to face the premium increases and lose benefits.
How were the policies profitable 20 years ago when commissions to Advisers were 130% upfronts + 20% trails, AND policies were significantly cheaper than they are today?
They weren’t profitable. The companies believed they were profitable based on their predictions as to what claims would emerge over the lifetime of the policies, but those predictions have turned out to be very wrong. So the companies thought the pricing was profitable, but it wasn’t. Many of the losses being reported over the past few years are on those 20 year old policies.
[quote=suggestion ]This problem could very easily solved by stripping out all ancillary benefits such as, specific injury, trauma or crisis benefit and only allowing an indemnity DI contract to age 65 or 70 with financials required at claim time regardless along with, income off-set clause from all sources and having the capability clause. Also, Own Occ definition for first 2 years then changes to an Any Occ definition after that. [/quote][quote=suggestion ]This problem could very easily solved by stripping out all ancillary benefits such as, specific injury, trauma or crisis benefit and only allowing an indemnity DI contract to age 65 or 70 with financials required at claim time regardless along with, income off-set clause from all sources and having the capability clause. Also, Own Occ definition for first 2 years then changes to an Any Occ definition after that. [/quote] Those contracts are there right now. Most insurers have “tradies specials”for those clients who focus on price ONLY, working with an intermediary who IS NOT an adviser but an order taker, and where BOTH participants want a quick sale
By banning new contracts from having overly generous benefits, including agreed value, it means the existing book of such policies can’t be challenged by new entrants. The policy holders of the existing “generous” policies will have no future choice of moving to a more competitive policy. Instead they will face a choice of accepting rising premiums on their current policies as the incumbents make up for their previous loss-leader pricing, or of losing the benefits that they thought they had, because they can’t get them from anywhere else.
So rising premiums and barriers for new entrants. This is a big win for the existing big insurers, who are now protected from the folly of their earlier approaches.
So rather than making then existing insurers clean up their mess, they are allowing them to profit from that mess.
And what about PI insurance?. It is a condition of an AFS license that you have PI cover… what if you can’t get it because of the increasing complexity of the regulatory environment? You would be obliged to hand back your license and inform your clients you will no longer be able to provide them with advice. When they ask why, then you can point the finger at those responsible.
On the matter of complexity, in a recent Money Management article (7/11/2019, page 14) the FPA pointed out that “when a consumer has a complaint, there are 10 different entry points (although 14 when you consider the number of regulators) at which a consumer can take their complaint up at. To this point – at some points there are multiple bodies and regulators. Further, if a financial planner has made a mistake, sanctions may be imposed by all 7 regulators, 3 investigative bodies and their licensee for a single error (plus professional associations if applicable)”. Have the inmates finally taken over the asylum??? What other profession has such operational hurdles to overcome? Eventually, there will be no-one left to turn out the lights.
This problem could very easily solved by stripping out all ancillary benefits such as, specific injury, trauma or crisis benefit and only allowing an indemnity DI contract to age 65 or 70 with financials required at claim time regardless along with, income off-set clause from all sources and having the capability clause. Also, Own Occ definition for first 2 years then changes to an Any Occ definition after that.
Just another string added in the “race to the bottom” Bow – we stopped recommending life insurance from our advise offering and haven’t looked back since so no loss to our business and the customer now bears all the risk!
This is very bad news for consumers. APRA don’t have a clue. This is just like LIF all over again. For all those smart Alec executives who think they have pulled off a winner with these changes, you should update your resume ASAP, because this rubbish, combined with the FASEA Code of Ethics and other draconian ASIC regulations, will see newly written life insurance business drop by 90%+ in the next 12 months. If you think life insurance is unsustainable now, you aint’ seen nothing yet.
Funny you should say “just like LIF all over again”.
Geoff Summerhayes, the APRA board member pushing this, was one of the main drivers of LIF when he was previously at Suncorp.
Yep, and when he was outed he basically denied it. He speaks with forked tongue. Look at the amazing job they (Suncorp) did with Asteron !