APRA to Improve Individual Disability Income Insurance Sustainability
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.
Related Links
Keywords: Asia Pacific, Australia, Insurance, Life Insurers, Reinsurers, Individuality Disability Income Insurance, Pillar 2, Capital Requirement, Regulatory Capital, Data Collection, APRA
Featured Experts
Trevor Howes
IFRS 17 technical advisor; AXIS actuarial modeling system expert; extensive experience in life insurance and life reinsurance, with focus on modeling, valuation, and financial reporting
Nick Jessop
Scenario modeling expert; risk management specialist; quantitative financial modeler
Pierre Xu
Quantitative researcher; portfolio management expert
Related Articles
EU Agencies Update LCR Rule and Macro-Prudential Policy Recommendation
The European Commission (EC) published the Delegated Regulation 2022/786 with regard to the liquidity coverage requirements for credit institutions under the Capital Requirements Regulation (CRR).
EBA Publishes Regulatory Standards to Identify Shadow Banking Entities
The European Banking Authority (EBA) published the final draft regulatory technical standards specifying the criteria to identify shadow banking entities for the purposes of reporting large exposures.
OSFI Discusses Benchmark Rate Transition, Sets Out Work Priorities
The Office of the Superintendent of Financial Institutions (OSFI) published the strategic plan for 2022-2025 and the departmental plan for 2022-23.
EBA Proposes Standards to Support Secondary NPL Markets
The European Banking Authority (EBA) is consulting, until August 31, 2022, on the draft implementing technical standards specifying requirements for the information that sellers of non-performing loans (NPLs) shall provide to prospective buyers.
EU Confirms Agreement on Rules on Cybersecurity and Banking Resolution
The European Council and the Parliament reached an agreement on the revised Directive on security of network and information systems (NIS2 Directive).
EBA Issues Standards for Crowdfunding Service Providers Under ECSPR
The European Banking Authority (EBA) published the final draft regulatory technical standards specifying information that crowdfunding service providers shall provide to investors on the calculation of credit scores and prices of crowdfunding offers.
EU to Amend Credit Risk Adjustment Rules; ESAs Submit Queries on SFDR
The European Council published a draft Commission Delegated Regulation to amend the regulatory technical standards on specification of the calculation of specific and general credit risk adjustments.
EU Confirms Agreement on Rules on Cybersecurity and Banking Resolution
The European Securities and Markets Authority (ESMA) published a paper that examines the systemic risk posed by increasing use of cloud services, along with the potential policy options to mitigate this risk.
MAS Amends Notice 635 and Issues Second Proposal on Green Taxonomy
The Monetary Authority of Singapore (MAS) published amendments to Notice 635, which sets out requirements that a bank in Singapore has to comply with when granting an unsecured non-card credit facility to individuals.
EC Consults on PSD2 and Open Finance; EU Reaches Agreement on DORA
The European Commission (EC) published a public consultation on the review of revised payment services directive (PSD2) and open finance.
