Letter

Letter to life insurers: Individual disability income insurance: deferral of implementation of the policy contract term measure

  • Life insurance
  • Current
    24 March 2022

Suspension of policy contract term measure

APRA, in consultation with ASIC, has given careful consideration to the potential solutions that have been submitted and the most appropriate course of action, taking into account the potential impact of APRA’s other sustainability measures and industry developments, most notably Treasury’s ongoing reviews on legacy product rationalisation and quality of advice.
In light of the above considerations and the challenges that industry has not been able to address, APRA has decided to suspend the IDII policy contract term measure for at least two years, at which time it will reassess its position. However, APRA remains of the view that there is inherent value in life companies having mechanisms other than price to address the risk of unsustainable product terms.

APRA’s expectations

While the IDII policy contract term measure is suspended, APRA expects life companies to demonstrably strengthen customer engagement, which has been shown by the recent industry submissions to be an area of weakness. This includes collecting information on changes to policyholder’s circumstances, including occupational and financial circumstances and dangerous pastimes, to enhance the ability of life companies to understand and manage the risks of their portfolios. Over time, such information could also be leveraged to improve customer experience and inform ongoing review of the appropriateness of products for their target market.
During the period of suspension, APRA also expects life companies to:
  • maintain a strong focus on IDII sustainability, including the uplift of capabilities and practices in accordance with APRA’s previously communicated expectations;
  • consider conduct-related matters arising from various law reforms alongside APRA’s sustainability measures, as previously communicated by ASIC. These reforms include the design and distribution obligations, unfair contract terms, claims handling and duty of reasonable care;
  • take steps to support policyholders in unsustainable IDII products transitioning to newer, more sustainable products, where appropriate;
  • actively contribute to the Treasury reviews mentioned above, with a specific focus on both the sustainability of products and distribution and appropriate outcomes for policyholders;
  • seek to identify possible alternative ways to effectively address the risk of price being the only lever to deal with contract terms that are not sustainable; and
  • strengthen their engagement with other industry stakeholders, particularly financial advisor bodies, in support of developing more robust solutions.
Industry actions in the above areas should contribute to mitigating the risk that the IDII policy contract term measure was intended to address and/or lessen the impact of some of the existing barriers to implementing the measure. Progress in these areas will stand the life insurance industry in good stead, regardless of the outcome of APRA’s future reassessment of the IDII policy contract term measure.
AUSTRALIAN PRUDENTIAL REGULATION AUTHORITY 2

New IDII products

An important milestone was reached when life companies released new IDII products in response to APRA’s other IDII sustainability measures that took effect on 1 October 2021. While it is not unreasonable for life companies to review and potentially revise their products in response to competitive offerings and feedback from the distribution channels, APRA expects all life companies, including reinsurers, to be disciplined in their actions and apply rigorous governance to any contemplated changes. This extends to appropriate involvement of life companies’ three lines of defence, and their Boards.
Life companies are reminded that IDII sustainability is about more than complying with APRA’s IDII product measures and requires product design to be considered holistically, with controls commensurate with the riskiness of the features offered. Likewise, premiums should be set with the objective of providing policyholders with a reasonable degree of stability over the lifetime of their products. Where upfront premium discounts are applied, the appropriateness and level of these discounts should be carefully considered from a sustainability perspective. The temporary nature of such discounts should also be made clear to policyholders.
During the period of suspension of the IDII policy contract term measure, APRA will continue to monitor and engage with industry on their progress towards IDII sustainability, including the ongoing review of life companies’ progress with meeting APRA’s expectations. In particular, APRA will continue to closely monitor market developments. Where life companies’ behaviour undermines the achievement of IDII sustainability, APRA will not hesitate to take strong action, including, but not limited to, increasing the IDII capital charge.
Long term IDII sustainability can only be achieved if all industry participants play their part. APRA expects life companies to continue making constructive contributions towards the achievement of an Australian life insurance industry with sustainable IDII products. Yours sincerely
Helen Rowell
Deputy Chair
AUSTRALIAN PRUDENTIAL REGULATION AUTHORITY 3