APRA sets life insurers 8 week deadline on disability insurance

2 May 2019

The Australian Prudential Regulation Authority (APRA) has sent a strong warning to life insurers that they need to urgently address concerns about the sustainability of individual disability income insurance.

The regulator has written to the insurers pointing out shortcoming with insurers’ strategy and risk governance, and pricing and product design as well as inadequate data and resourcing dedicated to dealing with disability insurance.

APRA Executive Board Member Geoff Summerhayes said most life companies had long been aware of the issues, but their efforts to address them had so far been inadequate. 

“In a highly competitive environment, life companies have focused on attracting policyholders through pricing and product features that are not sustainable. The result has been ongoing losses and a failure to deliver a satisfactory customer experience,” he said.

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“Unless these adverse trends are reversed, there is a risk some life companies will ultimately exit the market for DII, worsening consumer outcomes through reduced competition, accessibility and affordability.”

The APRA letter sets a deadline for life insurers to start taking a range of steps in response to APRA’s concerns, including formulating a strategy to address the issues identified by the thematic review, and reviewing DII product design and pricing practices to enhance its sustainability.

Summerhayes said life companies that failed to promptly and effectively meet APRA’s expectations would face consequences.

“The life companies involved in the thematic review have eight weeks to provide APRA with a detailed outline of how they intend to fulfil these requirements. If either their action plan or progress implementing it is inadequate, we will step up our supervisory intensity of that life company and consider imposing an increase in its minimum capital requirements,”
he said.

“Other life companies involved in the provision of DII products must also take action by submitting a self-assessment against APRA’s findings. Furthermore, we expect all life companies to examine whether the same types of issues exist in their other product groups that may be experiencing challenges, such as total and permanent disability insurance.”

“There is no quick fix for this complex problem, especially for the legacy business, but with strong, proactive leadership at an industry level, insurers can make the changes needed to regain community trust and restore DII to a sustainable footing. A profitable industry that delivers policies of real value is ultimately in the interests of both life companies and their policyholders.”

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There is an easy fix. Dont have mental illness as a claimable condition under DII. This is what is driving up the premiums.

Do life companies employ actuaries? Have life company actuaries reported concerns to APRA? Does APRA employ actuaries to review actuarial reports from life companies over the Present Value of future liabilities in contrast to the Present Value of Current Assets? Secondly, does APRA look at the Reinsurance Treaties held by local Australian insurance companies, where around 80% of the risk is carried by a multinational reinsurer or insurers? Eg, Munich RE, Swiss Re, Hanover RE, etc.

This has been an issue for many years. My response below is and extract from a document I have had on file for some while and was not written in direct response to this article

What occurs:
• Insurers bring to market new policies at lower premium rates than their closed product, or prior series offering. How can this possibly be responsible behaviour? The Insurers have done this for years knowing this is not sustainable.

• Under-pricing to artificially drive new business with full knowledge they the Insurer are going to increase the base rate regularly and within a short space of time of the product or series since brought to market.

• Insurers discount new policy premiums for new clients to get business on the books. These improved rates are not passed on to the existing clients. How can Insurers in the same breath argue the need to increase rates and bring to market a new series (or product) of income protection at a lower rate than the prior product that had a rate increase or was simply more expensive?

• Insurers provide lower rates for new clients on policies within a series. This behaviour results in consumers insured under the exact same product, however paying different premium rates depending on when they took out their policy.

• Cross-subsidising or providing package discounts and in some cases provide 3rd party services that if taken up will result in premium discounts for period of time. Insurance should be priced correctly from the outset. Each product needs to be correctly priced on its own merits

Reasons Insurers give for increasing rates.

• Bad claims experience. Insurers are in the insurance business. Surely, they expect there to be claims? The Insurers use their claims experience in order to price their books…if the existing book really was above expectation surely this should be factored into the pricing of the new book. In fact we see the opposite and new products are artificially priced lower with the Insurer knowing full well that this pricing is not sustainable as history has proven.

• Reinsurer treaty arrangements. These arrangements are not well designed and don’t price for the long term. Reinsurer ‘musical chairs’ with Insurers is an issue.

• Past poor underwriting of cover. Insurers advise they now have “tighter” underwriting processes. Not sure what this means as we have seen no significant change in underwriting. The application questions haven’t really changed much in 20 years.

• Past poor engagement with disability claimants. Once again not sure what this means as every legitimate claim needs to be paid and in good faith.

• Low interest rate environments. This the current most recent excuse for income protection rate increases. Curiously we are seeing lower cost IP policies coming to market at a time of a low interest rate environment whilst prior policies are on higher rates.

Actuaries are the brightest and best (both Insurer and Reinsurer). How is it that they get is so wrong all the time? This is not work experience. We are dealing with peoples’ lives and in some cases protecting their biggest asset which is their ability to generate income.

Potential solutions
• The appointed actuary Chief Actuary’s role should change for both insurers and reinsurers. The Chief Actuary needs to stand separate from the management of the company and definitely not be party to campaigns to drive new business at any cost.

• The Chief Actuary should have a “Trustee” like responsibility to ensure the product is priced sustainable for consumers. This would provide the counter balance required.

• The Chief Actuary has to report to the Regulator each time they increase base rates and include an acceptable explanation. Insurers to be penalised for poor pricing models.

• The Chief Actuary to report to the Regulator each time they price reduce within a product for new clients and not immediately pass back to existing product clients. The Regulator to monitor and step in when there is gross under-pricing or incentive discounting.

• Do not force clients to have to change products (or within a series) to obtain better rates that are on offer. Insurers should be obliged to pass back pricing improvements to existing clients. Not uncommon to find rates lower for cover within a current product (simply called a different series number).

• Do not allows Insurers to have multiple series in a single product. This allows for price and definition changes and at the same time creates the impression the product has not changed, as there is no name change. What is occurring is the product name e.g. ABC Income Protection does not change however the Insurers are releasing a new series within ABC Income Protection, this allows them to create the impression it is single product when in fact it is a conga line of legacy products. This has to be stopped for so many reasons, one of which is pricing new products cheaper at the expense of existing current clients and legacy product clients.

• Do not allow for continual legacy product or series behaviour. If the consumer believes their insurance policy is going to be current throughout their working life, then the Insurers need to be obliged to design products that are correctly priced at the outset

• Do not allow discounts on new policies if these discounts are not passed back to existing policy holders.

• Do not allow cross-subsidising within a product series or across legacy products as this is not sustainable.

Since the LIF the insurers have been acting completely irresponsibly by increasing existing customers premiums at unprecedented rates but reducing premiums for new business at huge rates also.
How can this be thought of as responsible and why is ASIC not looking at this? What the insurers are doing since the LIF is trying to create a churn problem that was not there in the first place and now they wonder why things are getting unsustainable for DI. It beggars belief.

Ultimately, the problem arose or was exacerbated when insurers (or their owners) thought it would be a good idea to serve two masters. The long term interests of their members AND the short term interests of their shareholder(s). This is not sustainable in our industry, and at the end of the day, the later always trumps the former.

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