AFA News 31 March 2022.
On 24 March 2022, APRA announced that they were going to defer the five-year contract refresh measure, which is the final element of the APRA Intervention in the IDII product. This is a pleasing outcome, given the concerns about the risk of client detriment and uncertainty.
In December 2019, APRA announced their intention to intervene in the Individual Disability Income Insurance (IDII) market in order to address long running issues with life insurer losses. The Intervention involved two Tranches, with the first being the removal of agreed value contracts, which came into force on 31 March 2020. The second tranche included a broader range of measures, including those related to the definition of income at risk and income replacement ratios that commenced on 1 October 2022. The policy contract term measure was originally part of this second tranche, however in May 2021, APRA announced that the policy contract term measure would be deferred for 12 months until 1 October 2022.
The policy contract term measure required all IDII policies to be subject to a refresh at least every 5 years, to reflect the current terms and conditions at that time, and to have the client subject to underwriting again for occupation, financials, and pastimes.
AFA Advocacy on Five-Year Refresh
We have had concerns about the potential implications for this measure, including with respect to people who are not gainfully employed at the time of the Five-Year Refresh, or who are on claim at that time. We were also concerned about a range of implementation issues, that would have presented further risks of client detriment. The AFA, along with the FPA, recently met with APRA and ASIC to discuss our concerns related to this policy contract term measure. It was very beneficial to explain these issues from an adviser perspective and to set out the implications for clients. We also documented these concerns to assist in their deliberation on this matter.
The APRA announcement was issued in the form of a letter to life insurers, stating that they will defer this measure for at least two years. This is a good outcome for clients, who will continue to have the confidence of a guaranteed yearly renewal contract, and also for advisers who need to work so hard to assist their clients to obtain and retain the cover that they need.
APRA’s statement confirms that they remain of the view that there is inherent value in life companies having mechanisms other than price to address the risk of unsustainable product terms. We hope that the changes that have already been made to IDII products, and the significant premium increases that have already been implemented, will address the issues with the sustainability of the IDII product, and as a result this policy contract term measure will no longer be required when it is reassessed in the future.
For any questions of the IDII intervention, please email firstname.lastname@example.org.
Issued 31.03.2022. AFA Policy & Education Update