ASIC and APRA crack down on duration-based premiums

Australia’s financial services regulators have challenged the value of duration-based pricing of life insurance products, warning insurers they need to be more transparent with consumers about the long-run outcome.

The regulators have made clear that the ultimate higher cost of early-stage sweetheart premium deals needs to be properly explained to consumers with ASIC in particular arguing that simplistic explanations do not go far enough.

In a letter to the insurer following a review of the sector, the Australian Securities and Investments Commission (ASIC) and the Australian Prudential Regulation Authority (APRA) pointed to the continuing challenges around the delivery of Individual Disability Income Insurance (IDII).

The over-arching message to the insurers is that they need to be clearer with consumers about what they are actually buying and the implications of the premium structures.

It noted APRA’s intervention in the IDII market and said notwithstanding that move, “product innovation across the industry is still limited”.

“ASIC and APRA observed that the competitive pressure in new business pricing contributed to the current prevalence of duration-based pricing,” the letter said.

“This means new consumers, who have been recently underwritten, are charged less to reflect that they are statistically less likely to make a claim. To attract new business, life companies may also offer additional temporary discounts. However, the effect of the duration-based pricing and other temporary discounts wears off over time, with commensurate premium increases during this period. “

The letter said the work of the two regulators had seen life companies reflect on whether their pricing model, and the resulting steeper premium curve, is suitable for all consumers,

“Some life companies are exploring solutions to balance price competitiveness and premium stability by introducing customisable options, such as a fixed premium period or a flatter pricing option, to ensure different needs can be met,” it said.

“APRA and ASIC expect life companies to:

• only use duration-based pricing where this reflects a reduction in the risk they face; and
• do more at the outset to make consumers aware of duration-based pricing and other temporary discounts and how they unwind over the life of a policy.

ASIC asked life companies to reflect on the adequacy of disclosure about duration-based pricing. In response, most life companies updated their Product Disclosure Statements and other consumer communications to show premiums will be higher the longer a policy is held. Some went further by explaining the effect of underwriting on reduced premium rates in early years or attempting to reflect duration-based pricing as an initial selection or new cover discount.

“ASIC considers that simply explaining that the length of time a consumer has held their policy is a factor impacting premiums fails to adequately capture the actual consequences of duration-based pricing. Additionally, a dollar-amount premium projection that incorporates the impact of duration-based pricing with all other variables does not go far enough to explain to consumers the nature and magnitude of its impact on premiums,” the letter said.