APRA will resume its intervention into the life insurance market to stem ongoing heavy losses in individual disability income insurance.
APRA announced its intervention in December last year, highlighting flaws in individual disability income insurance product design and pricing that the regulator said has seen the industry lose $3.4 billion in just five years.
However, the intervention was put on hold due to COVID-19 in March.
Since December, APRA said life insurers and friendly societies have lost a further $1.4 million due to the sale of individual disability income insurance.
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From October 1, individual disability income insurance providers will be subject to upfront capital penalties until APRA is assured they have addressed the regulator's concerns about the sustainability of the products.
Providers will also be required to make sure benefits to not exceed policyholders' incomes at time of claim and cease the sale of agreed value policies.
They'll also have to avoid policies with fixed terms and conditions of more than five years and ensure effective controls are in place to manage the risks associated with longer benefit periods.
"IDII plays a valuable role in providing replacement income to policyholders when they are unable to work due to illness or injury. APRA wants to ensure it remains available to Australians who need it, but that won't happen if life companies continue to haemorrhage money through the sale of IDII," APRA executive board member Geoff Summerhayes said.
"Our assessment is that the pandemic may further exacerbate the problems with this product, so decisive action can no longer be delayed. APRA has delivered a framework and financial incentives to fix this complex issue; it's now up to life companies to rise to the challenge of restoring IDII to a sustainable footing."