Life insurers operating in the group risk area ignored warnings that price reductions and soft underwriting practices would affect profitability according to the Australian Prudential Regulation Authority (APRA).
In its annual report released on Friday APRA also claimed that while insurers have lifted premiums to recoup losses this move has created adverse outcomes for superannuation fund members and has not addressed the structural problems behind the situation.
APRA stated that group insurers had written record amounts of default cover without underwriting and had weakened underwriting controls on optional levels of cover while including automatic acceptance of incremental increases in cover without the need for medical tests.
APRA also stated that group insurers, having to work through more complex Total and Permanent Disability claims, had admitted claims that may not have been covered by policy wording while failing to develop pools of experienced claims staff capable of handling more complex claims.
The report stated the sector was also impacted by higher claims levels as superannuation fund members have become more aware of the cover available to them through their funds and as lawyers have become involved in insurance claims.
According to the report group insurers were faced with lower interest rates which led to lower investment income and an overall decline in life insurance industry profitability of 12 per cent for the year with APRA stating much of this was the result of poor claims handling and management at the group life level, particularly within industry superannuation fund schemes.
"Despite a number of warnings from APRA, group risk insurers have been slow to accept that significant price reductions combined with softer underwriting practices and enhancements to benefits would ultimately affect profitability," APRA stated.
"The immediate response of affected life insurers has been to lift premiums sharply to redress losses. Not only has this led to adverse outcomes for superannuation fund members, it does not address the structural problems that caused the situation."