The prudential regulator will place restrictions on life insurers’ income protection policies from 1 October, saying the industry “can wait no longer” for reform following more than $1 billion of losses so far in 2020.
In a statement released on Wednesday, APRA said while it had put many of the proposed reforms to income protection policies on hold as a result of the COVID-19 pandemic, continuing poor results across the sector had spurred the regulator to take further action.
"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," APRA said.
"Since the December letter, life insurers and friendly societies have lost a further $1.4 billion through the sale of income protection insurance. Consequently, APRA has concluded that the industry can wait no longer to start seriously addressing concerns that threaten the product’s long-term availability in Australia."
The regulator said from 1 October, insurance companies would be subject to an additional capital charge "until APRA is assured they have taken adequate and timely steps to address sustainability concerns".
Further measures aimed at addressing riskier products, including the need to ensure income protection benefits did not exceed the policyholder's income at the time of claim, cease the sale of agreed value policies, avoid offering policies with more than five-year fixed terms, and ensure effective controls were in place to manage risks associated with longer benefit periods, would come into effect in October 2021, APRA said.
APRA executive board member Geoff Summerhayes said APRA wanted to ensure income protection products, also known as individual disability income insurance (IDII), remained available to those who needed them, and that the viability of the sector was being threatened at present.
"Our assessment is that the pandemic may further exacerbate the problems with this product, so decisive action can no longer be delayed," Mr Summerhayes said.
"APRA has delivered a framework and financial incentives to fix this complex issue; it’s now up to life companies to rise to the challenge of restoring IDII to a sustainable footing."
Editor's note: Following clarification with APRA, the above story has been updated to reflect that an additional capital charge to insurers will apply from 1 October 2020, with product measures coming into force from October 2021.
Single adviser practices culled from the industry’s largest licensees may be t...
AMP will launch a new phone-based intra-fund advice service for members of its S...
The union peak body has told the Treasurer that selling pensions giant Colonial ...