APRA has had enough of watching insurers haemorrhage money out of loose income protection policies. As of October 1, 2020, “upfront capital penalties” will be levied against insurers providing individual disability income insurance (IDII) – ie income protection insurance – that doesn’t meet strict new sustainability standards.

The Australian Prudential Regulation Authority had previously postponed its December 2019 reform agenda in March 2020 to let insurers cope with Covid-19, but after experiencing heavy losses this year APRA said it could wait no longer.

In a statement released Wednesday, APRA made clear that after losing $3.4 billion over the last 5 years and then another $1.4 billion since the December plan was released, the industry isn’t viable in its present shape. “Consequently, APRA has concluded that the industry can wait no longer to start seriously addressing concerns over IDII,” the regulator stated.

In an accompanying letter sent to providers on Wednesday, APRA said that while the challenges from Covid-19 remain, “IDII is a significant concern and is likely to be the product most vulnerable to the ongoing impact of the pandemic. APRA and industry cannot afford further delays in taking decisive action.”

APRA executive board member Geoff Summerhayes said APRA wants to ensure IP insurance remains available to Australians, “but that won’t happen if life companies continue to haemorrhage money”.

Mitigating risk

APRA expects providers to implement three principle measures that will mitigate some of the industry’s riskier product features.

The first of these is to ensure IDII policies do not exceed the policy-holders income at the time of claim and cease the sale of Agreed Value policies.

APRA also wants insurers to avoid offering IDII policies with fixed terms and conditions of more than five years, and to make sure “effective controls” are in place to manage the risks associated with longer benefit periods.

These measures encapsulate two broad areas of risk, APRA advised; product design features that aren’t “consistent with the principle of indemnity” and overly long contract time horizons.

Further, APRA noted in its release, providers should consider applying these underlying policies to its other insurance products – an exhortation that could pave the way for further governance mandates from the regulator.

New approach to risk advice

The sustainability measures being introduced by APRA will bifurcate the choices for existing holders of income protection insurance, according to the Financial Services Council.

This will impact the way risk advisers approach income protection insurance discussion with clients.