Capital crackdown reaches income insurance

A few big banks plus Macquarie face higher capital charges as APRA sets out to reform the rotten state of the market for income protection.

APRA yesterday said it "launched an intervention into the life insurance market in response to ongoing heavy losses in respect of individual disability income insurance."

In a letter to the industry yesterday, APRA announced a series of measures, including capital charges, "that will require life insurers and friendly societies to address flaws in product design and pricing that are contributing to unsustainable practices."

Life companies have collectively lost around A$3.4 billion over the past five years through the sale of DII to individuals (rather than through superannuation), APRA said.

APRA said it wrote 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."

At least one major reinsurer has indicated "it was no longer prepared to reinsure individual DII," APRA member Geoff Summerhayes said, adding "there is now a genuine risk insurers may start withdrawing from the market".

"Disability income insurance plays a vital role in providing replacement income to policyholders when they are unable to work due to illness or injury.

"In a drive for market share, life companies have been keeping premiums at unsustainably low levels, and designing policies with excessively generous features and terms that, in some cases, provide a financial disincentive for policyholders to return to work.

"Insurers know what the problems are, but the fear of first-mover disadvantage has proven to be an insurmountable barrier to them making the necessary changes."

Given what the regulator described as "the urgency of the situation, APRA has decided to impose an upfront capital requirement on all individual DII providers, effective from 31 March 2020."

The capital requirement will remain in place until individual insurers can demonstrate they have taken "adequate and timely steps to address APRA's sustainability concerns.

"In instances where individual insurers continue to fail to meet APRA's expectations, APRA may also issue directions or make changes to licence conditions."

APRA also said it expects life companies to better manage product features and pricing.