The Actuaries Institute has said that Australia’s A$5bn ($3.3bn) disability income insurance (DII) sector needs urgent reform, noting that failure to implement significant changes will reduce consumer access to affordable disability cover in the future.
The Institute has established a taskforce to identify where critical reform is needed, the professional body says in a statement. It has drawn on the skills and experience of almost 50 actuaries to support the DII taskforce. It has started liaising with regulators, and hopes to engage with the director community, insurance company management, advisers, product ratings agencies and consumer groups to drive significant, long-term industry changes. It will also review the professional requirements for actuaries in the disability income insurance business.
The Institute commissioned international professional services firm KPMG to compile a comparative research report Disability Income, An International Comparison, to help start the debate about changes needed to bring about a sustainable long-term solution that supports consumers.
The KPMG report states that individual disability income insurance does not adequately support a policyholder’s move back into work in Australia’s modern economy. The report also acknowledges increased concerns by Australia’s regulator about product sustainability.
The report says the sector needs simpler products, a reduction of ‘bells and whistles’, a change to definitions, and a review of the benefits to encourage those who can, to return to better health as soon as possible.
Mr Ian Laughlin, convenor of the Actuaries Institute’s Disability Insurance Taskforce, said, “Australia has a very competitive market and customers have been offered a smorgasbord of product features. However, they have also been subjected to multiple unanticipated premium increases.
“A decline in insurance company profitability despite these steep premium hikes has called into question the sustainability of disability income insurance in its current form, and suggests the potential for market failure.”
Mr Laughlin added, ”That raises real concerns for consumers, and the broader community, about future access to affordable DII cover.”
The Australian Prudential Regulation Authority announced in December 2019 that it had written to industry participants in response to ongoing heavy losses in the market. Life companies had collectively lost around A$3.4bn over the past five years through the sale of DII to individuals. APRA executive board member Geoff Summerhayes said life companies had kept premiums at unsustainably low levels and policy features were too generous.
The KPMG report found:
• competitive pressure has resulted in DII products that are complex, making them difficult and expensive to administer;
• these products can be problematic to manage from a claims perspective;
• guaranteed insurability has further aggravated sector problems by increasing the complexity of legacy business; and
• insurers have responded with increased premiums, perpetuating potential anti-selective lapses leading to worse claims experiences and falling profit margins.