The prudential regulator has now started to collect more granular information on insurance premiums in light of the deteriorating experience in individual disability income insurance (IDII) to identify potentially poor pricing practices.
Liberal Senator Ben Small asked the Australian Prudential Regulation Authority (APRA) to explain why life insurers had issues with profitability and what role it played in oversight of life insurance industry practices.
APRA said the factors that contributed the profitability issues in the life insurance industry were:
- Unsustainable product designs which, at times, had not conformed with the principles of insurability;
- Overly competitive pricing practices; and
- Changes in environmental factors e.g. increase awareness of, and claims for, mental health.
It said that while it had not been collecting detailed information on premiums, in light of the deteriorating experience in IDII, it had recently began collecting more granular data on IDII to obtain greater insights on the drivers of performance. The data included IDII premium increases and discounts which it said would allow APRA to identify potentially poor pricing practices.
“The primary reason APRA intervened in the IDII market was because product design was contributing to losses incurred by the insurance industry. Part of APRA’s intention with its intervention on IDII is to improve premium stability,” APRA said.
“APRA has been emphasising the importance of applying the lessons learned on IDII to other product groups (e.g. total and permanent disability (TPD) products, and trauma products) to ensure that all product groups are designed and priced sustainably.”
Small also asked if the regulator was aware that the combination of large premium increases and first year or first three years discounting practices made it difficult for financial advisers to provide advice on appropriate products for clients.
“APRA is aware that financial advisers need to factor in the initial discounts on new policies and premium increases for existing policies when providing advice to their clients,” it said.
“Tools available to advisers can provide projections which show the impact of increases in premiums due to increasing age, changes in discount levels and automatic increases in sums insured at an assumed rate. Advisers need to balance the short term and longer-term needs of their clients with the product design and pricing offered by the life companies.
“APRA notes that the price of new policies is not directly comparable to existing policies because of the initial selection effect and the differences that may exist between the new and old policies which could result in differences in expected claims cost. In respect of some in-force IDII products, premium increases are needed to reflect the expected underlying costs associated with expected future claims experience.”
To ensure sustainability in the life insurance industry APRA noted it was:
- Introducing a set of IDII sustainability measures which would take full effect from 1 October, 2022;
- Reinforcied the importance of applying the lessons learnt in IDII to other product groups (e.g. TPD and trauma) to ensure that all product groups were designed and priced sustainably; and
- Writing to superannuation funds and life insurers to reiterate the need for sustainable practices in insurance in super.