Senator Jane Hume has cited legacy products as one of the biggest barriers of innovation in the life insurance industry, while the Australian Prudential Regulation Authority (APRA) says the industry needs bear the burden of re-investment.
Speaking at the Financial Services Council (FSC), Hume said legacy insurance imposed the most significant cost on the industry.
“The FSC has conservatively estimated there are conservatively around 286 outdated life products and $22.6 billion of funds under management are allocated to aged products – now that’s a huge inefficiency,” she said.
“Even a small number of outdated products on insurance products can lead to incredible diseconomies of scale.
“Each closed, financial product requires a broad range of services to manage it and maintain it – my understanding is that these maintenance requirements for all products are not much lower than for those for current on-sale products.
“They require the maintenance of old technology and specialist accounting, audit disclosure and administrative services.”
Hume said running outdated systems led to higher costs, greater operational risks, and higher chances of fraud.
“It makes businesses pile money into managing and maintaining filing cabinets, rather than investing in product development or innovative claims management technology,” Hume said.
“When insurers spend too much time looking after aged products, they spend too little time thinking about how to best serve their customers.”
Helen Rowell, APRA deputy chair, said the industry had to be prepared to make the investments needed to get the simplification of things like legacy products.
“There’s a cost of doing that and the players in the industry need to accept they have to bear some of that cost,” Rowell said.
“Yes, there may be things the Government needs to do through regulation as well but it’s this idea of shared solutions and shared approaches rather than this is a problem that someone else needs to fix.
“And you’d get a better hearing from the Government if there was a sense there was a shared purpose and willingness to mutually work on problems.”