More pain to come for life insurers, APRA warns

In questions on notice to APRA, Senate economic references committee chair and Labor senator Alex Gallacher asked whether it was likely insurers would further raise premiums to cover the cost of losses in the 2020 financial year, which had seen four in 10 life insurers finish the year in the red, according to KPMG data.

“It is important to note that insurers cannot increase prices for current policyholders to cover losses on claims already made,” the regulator said.

“However, insurers will likely expect future claims from current policies to be higher based on recent claims experience and may increase prices on this expectation. APRA has seen some evidence of price increases in the market as a result of higher expected future claim costs, particularly the individual disability income insurance (IDII) product.”

Mr Gallacher also asked if APRA was “concerned about business failure in the life insurance industry”, with the latest statistics from the prudential regulator indicating the sector had seen a 63 per cent drop in revenue for the year to September 2020.

“APRA is satisfied that life companies are currently adequately capitalised and does not have concerns about imminent business failure in the life insurance industry,” the regulator said.

However, the regulator warned the business environment for insurers was likely to get worse before improving, with economists tipping a prolonged recovery from the pandemic that was likely to further exacerbate the claims experience for life insurance companies.

“In the past, there have been correlations between a downturn in the economy and high unemployment rates with deteriorating disability claims experience through increased incidence and, in the case of IDII, increased claim durations,” APRA said.

“The life insurance industry is therefore expecting to see worsening disability claims experience following the economic impact of COVID-19. Generally during economic downturns, policyholders are more incentivised to make disability claims and there also tends to be greater instance of mental health and other issues that increase the volume of claims.”