APRA warns of false dawn on IDII profitability
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.
The whole personal insurance industry is unsustainable, due to the regulatory destruction of professional insurance advice. Without advice, consumers will never get, or retain, enough insurance for their needs. Massive premium hikes for existing policy holders have papered over some financial cracks in the short term, but the structural trend for the industry is a death spiral.
I am about to review Insurance for a Doctor today who’s premiums have gone up 85% over three years and insurance companies can’t work out why people keep cancelling policies. I know one thing is that insurance companies and regulators will somehow still blame advisers….
I’ve had clients whose premiums went up 75% in one year! Unfortunately it’s not just insurers and regulators who blame advisers. Clients do too. They feel like they’ve been given bad advice when the insurance you recommended goes up so much in price. For those of us providing holistic advice, insurance has a negative influence on the broader relationship. It’s another reason so many advisers are giving up on insurance advice.
Ohh dear, the industry is going to be in more pain with APRA intervention. How about their back slapping too, “APRA sought to defend its intervention in the IDII market as having brought it “back from the brink.” They mention IDII is only profitable because of investment markets, but then on the other hand decide that they are solely responsible for profitability, which one is it?
I don’t think APRA should be celebrating too early. When do we expect the AFCA complaints to start rolling in due to people being denied claims past 2 years?
APRA seem to be heading down the same path as ASIC “chest beating’s” , vindictive and vicious.
Having now read the full APRA article at source, it’s quite alarming they seem to be completely overlooking a crucial issue in IDII profitability and sustainability. Volume decline.
Bond rates, repricing, and reserving all have an influence on sustainability, but none of those things will make much difference if there is a big decline in volume. Volume decline in any business reduces profitability and sustainability, due to the greater proportional impact of fixed costs, and reduced ability to achieve economies of scale. But volume decline has a far greater impact in personal insurance, because it tends to increase the average claims risk of those remaining. Customers with good health and other low risk factors are more likely to cancel their policies as premiums rise. Those whose health has declined since taking out their policy are more likely to maintain their cover in spite of affordability challenges. This increased average claims risk across the customer base leads to higher premiums, which leads to further exits of lower risk customers, etc etc = death spiral.
APRA will probably say there is no volume decline, because they “haven’t seen any data to support it”. Which is a bit like the Fed and the RBA saying inflation wasn’t a problem for months and months when it was obvious to everyone on the street.
Those of us on the IDII street can assure APRA there is a massive volume decline problem gathering pace. A lot of premium hikes went through early on without customers realising or reacting at the time. But after absorbing two or three big renewals in a row, customers are much more aware, and are angry. Cancellations and benefit reductions are now widespread. At the same time, new business is drying up due to excessive attacks on the insurance advice sector.
In about 3-5 years time I fully suspect to read an article in APRA’s quarterly “insight” publication, lamenting the demise of IDII caused by massive volume declines.
How on earth can Apra say there has been no volume decline in IDII. Everyone in this industry knows that new business is down at least 40% -50% and that’s what is being “publicly” admitted to advisers by BDMs. It’s probably much, much more. What sort of reporting feedback mechanisms does Apra have in place, seriously? Do they have to wait until the cyclone crosses the coast, when they could have been watching the building up of low-pressure system 500 miles off the coast for the last two weeks, and “bunkering down” . Give me strength!
One very clear indicator that something is rotten in the state of Denmark is that most IDII insurers are desperately bringing out so-called “improvements” on a regular basis to try and attract business and regain market share. There is a huge difference between those contracts that were made available in 1 October 2021 to what’s around today, both good and bad. The template introduced by the Institute of Actuaries seems to have been discarded entirely in some areas