APRA imposes capital requirements on DII

2 December 2019

The Australian Prudential Regulation Authority (APRA) has launched what it is describing as an “intervention” in the life insurance market in response to ongoing heavy losses in respect of individual disability income insurance (DII).

The regulator has released a letter it has written to insurers announcing 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. 

It said life companies had collectively lost around $3.4 billion over the past five years through the sale of DII to individuals (rather than through superannuation) and had written to the industry in May requesting urgent action to address the problems. Since then, insurers had reported further losses of $1 billion, prompting APRA to escalate its response.

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APRA executive board member, Geoff Summerhayes said that with at least one major reinsurer indicating it was no longer prepared to reinsure individual DII, there was now a genuine risk insurers might 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," he 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.

It said the capital requirement would remain in place until individual insurers could demonstrate they had 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 said.

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Disability insurance is in a death spiral because of mental health claims. By their nature, mental health claims are much easier to "embellish". But insurers are too scared to reject any mental health claims, for fear of backlash by the powerful mental health lobby.

It's time for disability insurers to exclude mental health from their policies altogether. Let the government provide that service and take on the role of claim verification. At the moment the skyrocketing costs of mental health claims are being borne by too few people.

All their profits are up hundred of millions, I want to see the profits attached to this story as well. setup for white label insurance like the UK were you can only get IP for 5 years max.

What a fantastic time to significantly disenfranchise all the specialist risk writers who would have been able to guard clients against canceling policies and write new business to keep premium inflows up. It’s not claims, capital adequacy or record low long term cash and bond rates that kills insurers, nor is it inflows, rating agencies or a race to the best definition at the lowest price - it’s all these things combined and all at once. Insurers in Australia have been on the precipice of disaster since 2005. Policy quality will fall and premiums will go up, right at the moment less advisers will be in a position to help and default cover has been hollowed out.

I think our society can do better than to create a new underclass of long term disabled that lost it all because of unplanned illness combined with government policy failure. Let’s look at this properly and urgently with people in the room that have actually held someone’s hand in the hospital and worked with their spouse to keep the family budget on track while they recovered.

Great comment.

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