Premium increases have emerged as the tactic of first resort for most Australian life insurers under stress testing scenarios put in place by the Australian Prudential Regulation Authority (APRA), the results of which have been released by the regulator.
APRA member and former insurance industry senior executive, Geoff Summerhayes, revealed that when confronted with the stress-testing scenarios, the most common actions (undertaken by the insurers) were premium rate increases, reduction, or suspension of dividends and capital injections.
Summerhayes also took the time to warn the insurers that they were facing a considerable image problem.
“At this moment the life insurance industry is under considerable pressure, facing significant issues, many of which, with the benefit of hindsight, have been quietly festering. Some of these relate to the recent concerns with claims management practices, raising questions about culture and conduct,” he said.
“The mispricing of risk, in group insurance schemes and disability products [which] has seen profitability in recent years fall and these issues are not yet resolved,” Summerhayes said.
“Legacy products continue to amplify complexity and operational risk, creating opportunities for innovation and disruption which places pressure on incumbent insurers.”
He noted that the stress-testing had also given rise to concerns that Australian insurers had still not appropriately come to terms with the problems which have plagued disability insurance.
“We in APRA are increasing our focus on this line of business, as part of our work on claims management practices with group risk insurers and superannuation trustees,” he said. “We know the industry is working towards improving terms and conditions, pricing and other structural changes and we welcome these responses. The challenge here though is to find the right balance between affordability and sustainability.”
The APRA stress-testing suggested that when confronted with given scenarios, and without allowing for management actions in response to the scenario, insurers experienced significant losses and a material decline in their capital.
“However, capital returned to near pre-stress positions once insurers factored in their particular mitigation strategies which included repricing, a reduction or suspension of dividends and capital injections,” the regulator’s analysis said.
