No ‘silver bullet’ to increase longevity product demand: APRA

At the Australian Prudential Regulation Authority’s (APRA) annual life insurance CEO roundtable last month, the industry participants discussed the impediments to innovation within the longevity solutions space.

According to APRA, the industry stakeholders identified “weak demand” as the key challenge that is holding life insurers from “providing and/or further innovating longevity solutions”.

“Stakeholders also highlighted that the complexity of the retirement ecosystem provides limited incentive for retirees and makes it challenging for insurers to design longevity products that are well-integrated within the system,” the prudential regulator said.

“Those factors, combined with distribution challenges (e.g. falling adviser numbers, high cost of financial advice and barriers to scale up advice) has, based on APRA’s bilateral engagements, hindered take-up of longevity solutions for retirees that have a genuine need.”

APRA added that at the roundtable, there was a “general consensus” among life insurers that an increase in demand for these longevity solutions is necessary in order for there to be a business case to invest in, and accurately and sustainably price risks.

The participants noted that limited awareness of longevity products, misconception about longevity products, and a “nest egg” mindset were key factors that are limiting demand among Australian consumers.

While APRA acknowledged that there is no “silver bullet” to increase demand, it said life insurers can play an important role in “leaning into the challenge”.

Based on its overseas study, the prudential regulator noted that countries with a high level of take-up of longevity products are those with a “strong level of compulsion or incentive provided by the government”.

“Participants commented that there is a genuine need for longevity solutions for certain cohorts of retirees, but those needs are often not recognised by the retirees,” APRA said.

“APRA was encouraged to hear that some insurers are proactively engaging with trustees on their retirement income strategies and taking steps to improve awareness and understanding of longevity solutions, including developing educational materials for superannuation members.

“Such collaborative effort will make a positive difference to improving member engagement and financial literacy, an area identified as a key challenge by trustees in the pulse check on retirement income covenant implementation.”

If demand was addressed, the roundtable participants said there would be “sufficient capital and support from life insurers’ parents” to back longevity solution offerings.

According to the life insurers, there is also hesitation around innovation in the space because the current legislative settings “limit the ability of insurers to rationalise legacy products and that this stifles innovation”.

“Establishing a legacy rationalisation mechanism would allow insurers to innovate safely and manage products which no longer meet member needs. Whilst APRA sees potential merit for such a mechanism, APRA encourages life insurers to take a considered approach to product development, based on meeting retiree needs and supported by a robust business case,” APRA said.

“Participants also noted that there are elements of APRA’s capital framework that are more constraining relative to other capital regimes but recognised that the demand challenge is the key in unlocking the longevity market. APRA acknowledged that capital settings have an impact on the supply of longevity products, but there are prudential considerations for APRA in balancing the financial resilience of life companies with commercially viable innovation.”