APRA suspends DII policy contract term sustainability measure

The Australian Prudential Regulation Authority (APRA) has decided to put on hold its plan for the implementation of the policy contract term measure in individual disability income insurance (DII) products.

APRA says it will suspend the measure for at least two years, at which time it will reassess its position.

The policy contract term measure is one of many actions APRA has introduced to shore up the individual DII product line, which has been losing billions for a number of years until recently.

The measure is intended to be a mechanism for life companies to update their individual DII products to take account of unsustainable contract terms and changes in the operating environment.

The prudential regulator announced the decision in a letter to life insurers and friendly societies last week, ahead of the October 1 deadline for the implementation of the measure. APRA had initially planned for the measure to take effect in October last year but pushed it back by 12 months to allow the industry more time to prepare.

APRA says it decided to shelve the measure for now because stakeholders have raised in their submissions the challenges of implementing it.

One significant challenge is potential material premium increases in the short term, driven in particular by significant uncertainty around policyholder behaviour when renewing cover and commission expenses.

The other relates to the risk of some policyholders inadvertently not renewing their cover, in the absence of effective engagement with the life company providing their cover.

APRA acknowledged the challenges associated with the operationalisation of the policy contract term measure but says the move, if it had proceeded, would have provided the industry with a valuable opportunity to make changes that would improve both the sustainability of individual DII products and effective customer engagement.

“It is therefore disappointing that the industry appears not to have engaged with this opportunity as fully and openly as expected, or with a view to sufficiently shift away from problematic legacy practices where needed,” Deputy Chairman Helen Rowell said in the letter.

Now that the measure is suspended, APRA says it expects life companies to demonstrate they will work to strengthen customer engagement, which has been shown by the recent industry submissions to be an area of weakness.

During the period of suspension, the regulator expects life companies to maintain a strong focus on individual DII product sustainability, including the uplift of capabilities and practices in accordance with APRA’s previously communicated expectations.

The industry must also take steps to support policyholders in unsustainable products transition to newer, more sustainable products, where appropriate and 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.

Click here for the letter.