'Still some way to go': APRA raises disability income insurance loss concerns
The prudential regulator has cautioned against concluding the individual disability income insurance (DII) market is back on a sustainable path and urged the industry to stay focused on improving pricing and product features.
Recent profits reported by the individual DII market are partly driven by Covid-19 reserve releases and financial markets movements that favoured insurers, the Australian Prudential Regulation Authority (APRA) says.
“At first glance, the recent run of reported profits in the individual DII market looks promising for an industry that has been plagued by sustainability issues,” APRA says.
“However, since the net gains from improved bond yields and the Covid-19 reserve releases that have contributed to recent profits are cyclical events, that could reduce or reverse.”
APRA says overall the industry continues to forecast future losses, albeit less than previously.
“As such, it is important that the industry remains disciplined with its product design and pricing to strike the right balance between sustainability and profitability,” the regulator says, adding “there is still some way to go before anyone should conclude that individual DII has returned to a sustainable state”.
In the five years to 2019 the collective losses from individual DII totalled $3.4 billion. Since mid-2021 to September last year the individual DII market has reported five straight quarters of net profit, after APRA introduced in 2019 extra capital requirements and other measures that led insurers to address product design and pricing flaws.
“The return to profitability for individual DII is therefore a positive sign for sustainability of the product,” APRA says.
“There may well be a light at the end of the IDII tunnel, but there is still a way to travel before we reach the end.”
APRA says the actions it took are intended to help bring the product back from the brink and ensure that these problems don’t recur in the future.
“Genuine sustainability means that the product is widely available and that the terms and conditions meet the needs of the customer at an affordable price,” the regulator says.
“This sustainability will only be achieved if insurers earn a sufficient return on their capital to allow them to continue to offer the product.”
APRA says repricing is expected to continue as many insurers still expect future losses from their current individual DII portfolio to rise.
“While repricing of existing policies is necessary for insurers to meet the increasing level of claims, it has produced poor outcomes for consumers,” the regulator says.
“APRA expects insurers to balance the need for premium increases with providing affordable and fit for purpose cover for policyholders.”
APRA says the new IDII products launched following its intervention measures should have much more stable premiums over the long term than the pre-intervention products.
