APRA warns of false dawn on IDII profitability

Mike Taylor

Managing Editor and Publisher

19 December 2022

Recent improvements in the profitability of individual disability income insurance (IDII) do not signal the end of the problem and that recent premium increases may not enough, according to the Australian Prudential Regulation Authority (APRA).

APRA has used its quarterly Insight publication to suggest that bond yields and other factors have served to disguise the fact that problems still exist with respect to IDII in Australia and that the insurers should be prepared for a reversal.

APRA sought to defend its intervention in the IDII market as having brought it “back from the brink” but has claimed that it will only remain sustainable if the insurers can earn a sufficient return on their capital to allow them to continue to offer the product.

“The return to profitability for IDII is therefore a positive sign for sustainability of the product. However, since the net gains from improved bond yields and the COVID-19 reserve releases that have contributed to recent profits are cyclical events, that could reduce or reverse,” APRA said.

“While further premium increases can be imposed to respond to a future deterioration in profitability, this reduces affordability and leads to poor consumer outcomes. This will be further exacerbated by the lower household income and spending in a high inflation environment.”

“Overall, the industry continues to forecast future losses (albeit less than previously), showing that there is still some way to go before anyone should conclude that IDII has returned to a sustainable state. As such, it is important that the industry remains disciplined with its product design and pricing to strike the right balance between sustainability and profitability.”

“There may well be a light at the end of the IDII tunnel, but there is still a way to travel before we reach the end,” the APRA analysis said.