Life insurers back APRA annuity consultation

The Council of Australian Life Insurers (CALI) said called the Australian Prudential Regulation Authority's (APRA) decision to consult publicly on capital settings for annuity products an “important step in expanding access to retirement solutions for Australians”.

Last week, APRA confirmed that the consultation would go ahead, which is said aligns with its goal to “support life insurers to increase the availability of retirement products for retirees”.

“The key change proposed will be the approach to calculating the ‘illiquidity premium’ in LPS 112 Capital Adequacy: Measurement of Capital,” APRA said.

“This would lower life insurer capital requirements for annuity products, provided certain risk controls are in place.”

According to CALI there are currently around 5 million people who are in, or preparing for, retirement, leading to an increasing demand for retirement income solutions, yet the uptake of these products is low.

“With Australians living longer, they are spending more time in retirement and need access to stable and secure solutions to help them manage their finances over their whole life. Australia’s life insurers stand ready to help,” said Christine Cupitt, CALI CEO.

“No one wants to worry about outliving their savings. We want people to have a lot more choice and control over how they manage their finances once they stop working.”

APRA said the proposal would be released in the second quarter of 2025.

Last year, APRA released notes from its annual life insurance CEO roundtable, which saw industry stakeholders identify “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.

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.