How APRA’s DII changes have dulled the market

The negative impacts of the changes enforced by the Australian Prudential Regulation Authority (APRA) on disability income insurance have been laid bare by new analysis from specialist life/risk research house Dexx&r which has pointed to reduced new premiums for up to a decade.

Australia’s major insurers went back to the drawing board on their disability income insurance products after APRA introduced measures to address what it described as the poor performance of individual disability income insurance products, claiming the industry had failed to design, price and manage IDII in an appropriate manner.

However, the Dexx&r analysis suggests that while the average premium per policy for new business will be lower than for those that preceded the APRA-induced changes, there will be lower levels of new premiums.

The analysis also predicts a reduction in the growth rate for DII in-force premiums from 5.2% currently to 1.6%.

The analysis said that, in the past, to age 65 benefits had made up a significant portion of new business.

It then went on to say: “Given the restrictive terms applicable to claims that continue beyond two years and, when compared to the significantly higher premiums now applicable to benefits payable through to age 65 the majority of new business will be policies with a two year benefit”.

“Disability Income policies enjoy a higher market penetration with self-employed professionals and trades people when compared with employed white collar workers. The inclusion of offsets for passive and unearned income will severely limit the suitability of post 1 October 2021 for any person who is involved in a business with several other practitioners and in receipt of a profit share, dividends or other form of business income distribution.”

“Where any self-employed person is in receipt of passive and/or “unearned business income”, either at policy inception or later at the time of claim, under current offset wordings the amount of monthly benefit payable is uncertain and may be reduced to nil.”

“As all current products are only available on an indemnity basis the previous higher premiums per policy applicable to agreed value policies with benefit payable through to age 65 will further lead to lower premiums applicable to new business.”

“The limited benefit of adding Increasing Claim Benefit to a 2 year benefit period will mean that the total premium per policy will be lower than was the case before 1 October 2021 when this option was commonly added to age 65 benefits.”

“Taking all the above factors into account we have significantly reduced projected new premiums over the next ten years. Mitigating this reduction is an expected improvement in the attrition rate and premium growth from alterations to existing in-force business.”

“Over the ten years between at June 2011 and June 2021 Disability Income In-force premiums increased by 5.2% per annum from $1.7 billion to $2.8 billion.”

“Taking into account the impact of the reduced market for current on sale products in-force Disability Income premium is projected to increase by an average annual growth rate of 1.6% to $3.3 billion at June 2031.”