The life insurance industry must consider shutting down legacy products so it can update back-office systems, the Australian Prudential Regulation Authority (APRA) says.

In a submission to the Parliamentary Joint Committee on Corporations and Financial Services industry inquiry, APRA says by tackling the legacy product issue, life insurers could invest in better systems and data management.

“Historically, life insurers have underinvested in their systems and are unable to efficiently manage the ever-increasing number of legacy products. Data on legacy claims and policies is not readily available in a reliable way to inform decision-makers.”

The regulator says it has been concerned about underinvestment in back-office systems for some time. Some insurers have started upgrading their systems, but many with legacy systems find this a challenge.

“A lack of robust, reliable data, together with old systems and software, imposes significant constraints on the ability of an insurer to manage its business efficiently.”

Insurers face regulatory hurdles in shutting down legacy products, the regulator says.

“There are a number of very complex legal, consumer and tax issues that arise if a life insurer seeks to move policyholders from a legacy product to a new product.”

From 2007-10 the Government worked with the life industry to create a mechanism for shutting down legacy products, but this was never finished or implemented.

“APRA continues to strongly support the need to comprehensively address this issue,” the submission says.

“From the perspective of the product provider, it would help mitigate the increasing operational risk that such products create, as well as improve the industry’s operational efficiency.

“From the consumer perspective, it has the potential to improve consumer outcomes by updating definitions, improving efficiency and administration, and lowering costs.”