Pricing practices: ‘more needs to be done’, say regulators
Life insurers have been told they need to further improve their pricing practices or face the prospect of regulatory action from the Australian Prudential Regulation Authority (APRA) and the Australian Securities and Investments Commission (ASIC).
A joint APRA and ASIC review of the industry’s practices in relation to premium increases, including subsequent corrective action taken by some life companies, found “more needs to be done” after the regulators aired their concerns in December last year.
APRA and ASIC wrote a letter to the industry, outlining their observations from the review and what they expect from insurers over the next 12 months.
The observations focused on premium increases, marketing and disclosures and product design.
“APRA and ASIC will monitor the progress of life companies in meeting regulatory, consumer and community expectations of pricing decisions, marketing and disclosure, as well as product design, to deliver better consumer outcomes,” the letter says.
“We will consider appropriate regulatory action if our expectations are not met.”
On premium increases, the regulators say life companies need to strengthen their risk management frameworks and compliance assurance around re-rating practices.
The industry should examine their contracts to ensure that the terms about how and when premiums may change are transparent and not unfair.
“Life companies tend to rely on unilateral variation clauses that allow them to re-rate premiums,” the letter says.
Unilateral variation clauses carry a heightened risk of being unfair and they may be considered more acceptable if the variation power is clearly expressed; only goes as far as is necessary to allow the business to achieve its legitimate business interest; and provides a balancing right for the consumer where the change could be materially detrimental.
On marketing and disclosures, the letter says the industry should do better at explaining how premiums are calculated and how they might change over the life of the policy. This includes both point of sale and ongoing communications.
The letter says the Council of Australian Life Insurers has informed the regulators that the industry is developing a new set of premium labels.
The intention is for these to be adopted by industry for retail advised policies by July 1 next year. They are also developing guidance for life companies and financial advisers on disclosure and marketing materials that articulate the different premium types and when these might increase.
“This is welcome, but only forms part of the solution to managing consumer expectations of how premiums work,” the letter says.
“Life insurance premiums have been volatile for many consumers in recent years. With this greater volatility, comes a greater responsibility for life companies to ensure consumers understand how premiums are likely to change.”
On product design, the regulators want to see an improvement in product governance and as a starting point, the industry should start by considering consumer needs, including premium stability.
“Premiums should be aligned to the risks borne by the life companies, noting that these are products designed to be held long-term,” the letter says.
Click here for more from the letter.