Agreed Value policies will become a thing of the past under the Australian Prudential Regulation Authority’s (APRA’s) tough new approach to disability income insurance (DII).
The regulator has made its position clear to the major life insurers, listing the ending of Agreed Value policies at the top of a list of things it expects the industry to do to address the ongoing problem in the DII space.
It said that it expected of the life companies that they would better manage riskier product features by:
- ensuring DII benefits do not exceed the policyholder’s income at the time of claim, and ceasing the sale of Agreed Value policies;
- avoiding offering DII 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.
The approach came at the same time as APRA announced the imposition of a upfront capital requirement on all individual DII providers which would become effect from 31 March, next year, and would remain in place until the insures could demonstrate they had taken adequate and timely steps to address the regulator’s concerns.
APRA has also signalled that insurers are likely to face higher regulatory costs in circumstances where it will upgrade data collection around DII.
APRA executive board member and former insurance company executive, Geoff Summerhayes said the regulator had felt obliged to act because life companies had collectively lost around $3.4 billion over the past five years and at least one major reinsurer had indicated it was no longer prepared to reinsure individual DII.