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    APRA to Improve Individual Disability Income Insurance Sustainability

    December 02, 2019

    APRA has decided to impose an upfront capital requirement on all individual disability income insurance providers, effective from March 31, 2020. In a letter to industry, APRA announced a series of measures (detailed in an attachment to the letter) that will require life insurers and friendly societies to address flaws in product design and pricing and include a Pillar 2 capital charge (communicated to affected companies in December 2019) for insurers and reinsurers. For some of these measures, APRA is seeking feedback on specific design details by February 29, 2020 and it will finalize and communicate its position on these details by June 30, 2020. APRA will also introduce an individual disability income insurance data collection, which is due to be released mid-next year and will help APRA to monitor life companies’ progress in meeting its expectations.

    This intervention into the life insurance market is in response to the ongoing heavy losses in respect of individual disability income insurance. By introducing this package of measures, APRA is forcing the industry to better manage the risks associated with disability income insurance and to address unsustainable product design features—or face additional financial penalties. To underline the urgency of the situation, this decision to impose an upfront capital requirement on all individual disability income insurance providers has been taken. The capital requirement will remain in place until individual insurers can demonstrate they have taken adequate and timely steps to address the sustainability concerns of APRA.

    In instances where individual insurers continue to fail to meet APRA expectations, APRA may also issue directions or make changes to license conditions. APRA also expects life companies to better manage riskier product features, including by: 

    • Ensuring that the disability income insurance benefits do not exceed the policyholder’s income at the time of claim and ceasing the sale of Agreed Value policies
    • Avoiding offering the disability income insurance policies with fixed terms and conditions of more than five years
    • Ensuring effective controls are in place to manage the risks associated with longer benefit periods

    Life insurance companies have collectively lost nearly $3.4 billion over the past five years through the sale of disability income insurance to individuals (rather than through superannuation). APRA had written to the industry in May requesting urgent action to address the problems. Since then, insurers have reported further losses of $1 billion, prompting APRA to escalate its response. With at least one major reinsurer indicating it was no longer prepared to reinsure individual disability income insurance, APRA Executive Board Member Geoff Summerhayes said there is now a genuine risk insurers may start withdrawing from the market.


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    Keywords: Asia Pacific, Australia, Insurance, Life Insurers, Reinsurers, Individuality Disability Income Insurance, Pillar 2, Capital Requirement, Regulatory Capital, Data Collection, APRA

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