In our Spring 2020 edition of the Life Insurance Bulletin, we covered a report from the Actuaries Institute Disability Insurance Taskforce which shone a light on the long term sustainability of disability insurance, particularly individual disability income insurance product offerings in both the retail and group space, which has for some time now, been of significant concern within the industry.

Since that time, industry concern has also centered on group insurance more specifically, with APRA having identified ‘a re-emergence of some concerning developments in group life insurance in superannuation in relation to premium volatility, availability and provision of data, and tender practices.’¹

On 9 March 2021, APRA wrote to life insurers and registrable superannuation entity (RSE) licensees, urging them to address these concerning trends and practices in the provision of insurance to superannuation members.² APRA made note of the fact that between 2012 and 2016, ‘insurers experienced significant losses’ which resulted in large premium increases and tighter policy terms. Furthermore, trustees had great difficulty enticing insurers to tender, all of which resulted in a poor outcome for superannuation members.

Recent trends have followed a similar path, with APRA having identified ‘a deterioration in group life insurance claims experience’, which has impacted significantly on life insurer profitability. In light of what occurred between 2012 and 2016, APRA has renewed concern that ‘members are likely to be adversely impacted through further substantial increases in insurance premiums and/or a reduction in the value and quality of life insurance in superannuation.’

Premium Escalation

A key indicator in this regard is the recent APRA data, which confirms that ‘insurance premiums per insured member have been escalating during 2020.’ This has resulted in RSE licensees tendering more frequently and being attracted to unsustainable pricing from insurers keen to be selected.

However, APRA considers that this is unmanageable long term and will inevitably ‘lead to significant increases in premiums at the end of premium guarantee or contractual periods.’ APRA observes that ‘ultimately, members are not best served by such unpredictability and volatility in insurance premiums, with members paying more in future for insurance as a result of unsustainable prices being offered to win tenders in a prior period.’

Insufficient Quality Data

Gathering quality data to make informed design decisions and price appropriate insurance arrangements continues to be an issue for insurers and RSE licensees alike. APRA considers:

‘that this is due to both the varying quality and type of data captured by RSE licensees on members, as well as varying approaches to providing such data to insurers.’ APRA believes that this can result in poor outcomes to members through price volatility and may impact availability of insurance through superannuation.’

Tender practices

APRA has otherwise observed that there has been an increase in ‘undesirable tender practices, including abbreviated timeframes for the tender process, or to respond to revisions in insurance design or other parameters as part of that process, being imposed.’ APRA has identified that some RSE licensees are seeking to have a major role in determining the reinsurers that must be used. Further, the data provided to life insurers is often ‘inadequate, out of date and/or not made available to all tender participants.’ APRA considers that the tender assessment criteria should ‘align with and reflect the key requirements of an RSE licensee’s insurance strategy and include criteria beyond price, such as service levels, claims philosophy, member access to insurance information and member education.’

What to expect?

APRA has certain expectations of RSE licensees and insurers going forward in this regard. In short, the expectation is that steps will be taken to ‘ensure that insurance offerings and benefits are sustainably designed and priced, provide appropriate value for members, and adequately reflect the underlying risk and expected experience.’

More specifically, ‘RSE licensees should maintain clear insurance strategies that reflect a scheme design for default insurance’ which ‘appropriately balances the needs of members and the cost of insurance.’ Further, ‘RSE licensees should maintain, and make available to insurers, high quality and sufficiently granular data to support a thorough understanding of fund membership and sound insurance benefit design.’ APRA refers to the soon to be finalised Prudential Standard 250 (also covered in this edition of the Life Insurance Bulletin) which ‘requires RSE licensees to maintain sufficient records that can form the basis for insurers to assess and price insured benefits.’

Regarding tender practices, APRA expects that tenders will be ‘conducted in such a way that insurers are given adequate time to consult on scheme designs and appropriately price the risks and benefits. New data that becomes available during the tender process should be provided to all participants.’

RSE licensees and insurers can expect that APRA will:

‘actively monitor progress against the expectation set out their letter of 9 March 2021. Through APRA’s supervision in this regard, it is hoped that ‘RSE licensees and life insurers will take steps that will support the provision of high quality and sustainable insurance outcomes over the medium to long-term for both current and future superannuation members, and reduce the unpredictability and volatility in insurance product design and pricing.’

APRA has warned that further action will be considered if such steps are not adopted.

¹https://www.apra.gov.au/sustainability-of-life-insurance-superannuation

²Email from APRA to mailing list dated 9 March 2021