Disability income insurance (DII) continues to be a loss-making venture for life insurers as the prudential regulator undertakes a comprehensive review of its sustainability, pricing and the actual benefits delivered to policyholders.
Otherwise known as income protection insurance, DII replaces policyholders' income in the event they are unable to work due to illness or injury.
DII has been a "heightened focus" for APRA over the last 12 months - particularly how it's offered outside of superannuation.
The interplay between ratings houses and independent financial advisers recommending products with additional "bells and whistles" is an area APRA will target.
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Phase one of APRA's review into DII kicked off with roundtable discussions with reinsurers on August 2017, which unveiled DII as a "loss leader" compared to other insurance offerings.
Life reinsurers often rely on cross-subsidisation, APRA said, meaning DII is subsidised by other business lines, such as lump sum death and total permanent disability insurance.
"The reinsurers have indicated they would like to reduce cross-subsidies as much as possible, and it appears this issue is now being given greater consideration by the boards and management of reinsurers," APRA said.
Several reinsurers told APRA they believe the current individual DII products were substantially under-priced relative to the benefits they offered. Many also believed a DII product should include considerable product simplification, tighter definitions to more closely specify claims eligibility and benefits that promote return to work, and appropriate pricing.
DII portfolios stemming from older reinsurance arrangements and closed to new business proved to be most challenging for reinsurers.
The resourcing and reporting capability of cedants or primary writers is another area reinsurers pointed out could be improved.
Phase two, which is currently underway, will focus on cedants' ability to drive positive changes to mitigate the product line's underperformance and their commitment to offering offer this product - and the financial protection it offers - to the community.
In other initiatives, APRA is currently conducting a post-implementation review of its prudential and reporting standards and related guidance material for superannuation.
The review, it said, is not intended to revisit the policy intent or objectives of the reforms, rather to see if the prudential framework is operating effectively and efficiently, and where need be, improvements can be made.
APRA recently released topic paper three (requirements, operational risk and outsourcing) and four (investments) to facilitate discussion.
Some of the questions APRA poses to the industry include: if the objectives of the reporting standards and reported information are well understood; if the prudential standards achieve stated objectives; and what are the ongoing compliance costs associated with the prudential standards.
The consultation process will consist of roundtables, small group discussions and bilateral meetings. Submissions close on 26 September 2018.