APRA announces changes to disability income insurance
On 2 December 2019, the Australian Prudential Regulation Authority (APRA) announced a series of measures, including capital charges, requiring life insurers and friendly societies to address flaws in product design and pricing that are contributing to unsustainable practices in the sale of individual disability income insurance (DII), often referred to as income protection insurance.
APRA is concerned that life companies have been keeping premiums at unsustainably low levels in an attempt to capture market share. The life companies have also designed policies with excessively generous features and terms that, in some cases, provide a financial disincentive for policyholders to return to work.
To ensure life insurers meet APRA’s expectations, APRA will impose an upfront capital requirement on all individual income protection providers, effective from 31 March 2020. The capital requirement will remain in place until individual insurers can demonstrate they have taken adequate steps to address APRA’s 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.
Has APRA announced what changes will be made?
Yes, APRA has stated its expectations and is seeking feedback by 29 February 2020 on specific design details. After consideration of the feedback received APRA will issue its final position by 30 June 2020.
What changes has APRA said it expects to see being made by income protection insurance providers?
Ensuring benefits do not exceed the policyholder’s income at the time of claim
Ceasing the sale of agreed value policies
Avoiding offering income protection 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.
APRA will make the following changes, effective from 31 March 2020:
Impose additional upfront capital requirements on all individual income protection providers
Insurance providers must discontinue offering insurance contracts where the income at risk is not based on income at the time of claim, which effectively means no more agreed value contracts can be sold.
Other APRA changes, effective from 1 July 2021, include:
Income at risk to be based on annual earnings at the time of claim, and not be able to look back more than 12 months
The removal of excessive income replacement ratios by imposing limits of 100% for the first six months and 75% thereafter, subject to a $30,000 per month cap
A maximum term of five years, with a right to renew
Insurance providers must have adequate risk management processes in place to mitigate the risks associated with long term benefit payment periods.
What happens to existing policies?
Existing retail income protection policies which include a ‘Guarantee of Renewability’ in their policy wording will continue.
Are policies which meet APRA’s new expectations available now?
No, all advised individual retail income protection policies currently available are not subject to the policy changes expected by APRA. In order to purchase an income protection policy which takes into account APRA’s expectations you will have to wait until the insurance providers have issued new policies with new Product Disclosure Statements.
The content on in this article has been prepared by Consultum Financial Advisers Pty Ltd ("Consultum"), ABN 65 006 373 995, AFS Licence No. 230323.
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