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RGA warns industry on disability protection losses

Life insurers have lost $1.1 billion on disability income products over the past five years, based on data from the regulator, according to RGA Australia Head of Underwriting and Technical Services Meredith Barnes.

“How many businesses in Australia today can sustain a billion-dollar loss over any five-year period and not see that as a call to action to remediate the underlying issue?” she said.

“Masking the individual disability income losses are offsetting profits made from other product groups.”

Based on Australian Prudential Regulation Authority data, the life industry generated a $4.8 billion profit on individual lump sum insurance during the five years, Ms Barnes told exclusively.

She says combining the lump sum business results with disability income gives a more acceptable overall profit margin of about 7% over the period.

“How realistic is the cross-subsidisation, and how sustainable is the practice of offsetting material losses from one product group against more profitable business?” Ms Barnes said.

“And how sustainable is the very real prospect of ongoing premium increases?”

Recent analysis by Rice Warner for RGA Australia shows the average retail disability income premium increased by 9% between 2013 and 2014, while the average group premium increased 19%.

“Change is clearly necessary to contain the prices of premiums, rein in losses and ultimately assist with the conversation our industry needs to have with its customers,” Ms Barnes said.

“I see encouraging signs the life industry has begun taking meaningful steps to embrace consumer ‘wellness’ as a realistic goal.”

Ms Barnes says “wellness” will mean insurers finding new products and approaches to help customers meet their financial needs and return to work.

“This is getting disability income insurance back to where it needs to be, with realistic premiums and claims payments, while generating sustainable, long-term outcomes for the consumer,” she said. “Ultimately, claims must be funded out of premiums.”

While insurers may cross-subsidise segments to smooth premiums, this means customers may not pay the “correct” amount for their cover.

“Consumers want a disability product that is priced fairly and will be there to support them in times of need,” Ms Barnes said. “We know the current disability income product is underpriced and needs significant increases to break even, let alone generate profits.

“I wonder whether our market has focused on product ‘bells and whistles’ to the detriment of designing simple and affordable policies to meet the expectations of our customers.”

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