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Design at core of insurance issues
Better insurance product design has to sit at the centre of addressing significant problems within the Australian disability income insurance market.
That is the assessment of major reinsurer Munich Re, which has this week pointed to further data which it says confirms that the Australian disability income insurance market (DII), is in deep trouble and may be unsustainable.
The company pointed to the latest Australian Prudential Regulation Authority (APRA) statistics which showed Australian insurers reported after-tax losses of $394 million in their retail disability income insurance businesses in the last quarter of 2014 and said the data "reveal that insurance companies have been having difficulties in the retail DII market for a number of years, sustaining net losses of over half a billion dollars in 2014 alone".
Munich Re then referenced the results of a "major investigation" by its Australian arm, Munich Holdings of Australasia (MHA), which it said had brought to light just how much trouble the disability insurance market is in.
"There are serious concerns regarding the sustainability of current retail DII products," it said.
Reflecting findings it had previously reported to the market, the Munich Re release said results of the analysis highlighted that the long-term cost of claims was significantly higher than allowed for in office premium rates and that key results included:
- The cost of DII claims has been increasing over the last decade. This is due to an increase in the incidence of claims, rather than any change to the recovery rates of DII claimants.
- The rate of claims due to sickness increases with policy duration. The increase is significantly higher than the industry is pricing for. Sickness claim rates for policies in force for 12 years are double that of policies in their first year.
- The incidence of accident-related claims (overall) is increasing. From 2009 to 2013, there was a significant increase of 47 per cent in the rate of accident claims occurring.
Commenting on the issue, MHA's head of life, Andrew Linfoot said the company's research had revealed that current products typically had claims costs that were 20 per cent to 35 per cent above levels that would deliver a reasonable return for shareholders.
"This suggests that life offices are adding losses to their books with each new retail DII sale," he said.
Linfoot said that while price was a major factor, over time DII benefits and other terms and conditions have become more generous which had contributed to increasing claims costs.
"Each insurer needs to identify and address the causes that have led to these concerns. A return to sustainable and sound design must become a priority if the long-term future of DII is to be achieved," he said.
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