APRA warns life insurers on reputational risk

The Australian Prudential Regulation Authority (APRA) has revealed it has warned major life insurers that they stand to suffer reputational risk if they do not adequately oversee the sales practices around their products.

The revelation has been made in the latest APRA Insight publication and comes at a time when risk advisers are seeking to come to terms with the interim recommendations of the so-called Trowbridge report, with some suggesting that not enough onus has been placed on the insurance companies.

The APRA analysis said that, over a number of years, lapse rates for individual risk business had risen and were "significantly higher than those which prevailed several years ago".

"There has been no sign of any reversal of this trend during 2013/14," it said. "The worsening lapse experience has been attributed to a number of factors including a declining need for risk insurance by ageing ‘baby boomers', stronger competition in the market, pressure on household budgets leading to some pruning of discretionary expenditure, and the longer-term impact of premium rates that automatically increase each year with age."

The analysis said it was also possible that consumers were recognising that the life insurance cover they hold may no longer meet their changing needs, and that "product ‘churn' by financial advisers in light of the attraction of very high up-front commission rates for new business has contributed to lapse rates".

"Consistent with the Australian Securities and Investment Commission's (ASIC) recently completed review of industry sales practice, APRA has highlighted to insurers the significant reputational risk attached to inadequate oversight of sales practices," it said.

The APRA analysis also pointed to the generally lack-lustre profit performance of the life sector, stating that life insurer aggregate profits had been in steady decline for the last five years.

"The decline in the early part of this period could be attributed, in some part, to highly variable year-on-year investment market returns but, more recently, the progressively deteriorating claims experience of risk insurance business (including associated significant reserve strengthening) has been a prominent and unmistakeable driver," it said.