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APRA resumes work to enhance sustainability of individual disability income insurance

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.

In a letter to industry today, APRA 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.

APRA has also asked life companies to consider and apply these underlying principles to their other insurance products.

APRA Executive Board Member Geoff Summerhayes said: “IDII plays a valuable role in providing replacement income to policyholders when they are unable to work due to illness or injury. APRA wants to ensure it remains available to Australians who need it, but that won’t happen if life companies continue to haemorrhage money through the sale of IDII.

“Our assessment is that the pandemic may further exacerbate the problems with this product, so decisive action can no longer be delayed. 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,” Mr Summerhayes said.

Copies of the letter are available on APRA’s website at: Final individual disability income insurance sustainability measures.

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Contact APRA Media Unit, on +61 2 9210 3636

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For more information contact APRA on 1300 558 849.

The Australian Prudential Regulation Authority (APRA) is the prudential regulator of the financial services industry. It oversees banks, mutuals, general insurance and reinsurance companies, life insurance, private health insurers, friendly societies, and most members of the superannuation industry. APRA currently supervises institutions holding around $9 trillion in assets for Australian depositors, policyholders and superannuation fund members.