Individual disability income insurance (DII) providers have been given more time by the prudential regulator to implement the policy contract term measure, one of three key actions they must undertake to shore up the sustainability of the product line.

The Australian Prudential Regulation Authority (APRA) says the deadline has been pushed back by 12 months to October 1 next year, in a letter to life insurers and friendly societies informing them of the deferral.

“It has become clear that the industry is unlikely to be able to develop viable solutions for implementing the measure by APRA’s previously communicated deadline of October 1 2021,” the APRA letter says.

“APRA is aware that life companies have considered various options, but to date have not settled on solutions that satisfy both the legal and operational constraints and without unintended adverse consequences for consumers.”

The regulator says the new deadline will provide life companies more time to implement the policy contract term measure.

“APRA expects life companies to intensify their efforts to explore and develop workable solutions to meet the intention of APRA’s policy contract term measure and to proactively keep APRA informed of progress,” the regulator said.

The policy contract term measure limits new individual DII policies to a period not exceeding five years. It may allow a policyholder the right to enter into new contracts when the current policy expires without a medical review, on the terms and conditions applicable to new contracts then on offer by the life company.

APRA says the measure is an “important mechanism” to manage the risks associated with long contract terms.

“Without the policy contract term measure, it is unlikely there will be a change to the current practice that effectively locks in terms and conditions for extended periods of time, leaving premium changes as the primary (or only) lever to deal with the impact of external changes on [individual] DII sustainability,” the regulator said.

APRA says it expects the other two measures – income risk and income replacement ratio – to be implemented by October 1 this year for all new individual DII policies as previously communicated in September last year.

“APRA’s product measures are intended to operate as boundaries, aimed at addressing fundamental risks associated with [individual] DII,” the regulator said.

“Ultimately, however, it is the responsibility of life companies to proactively manage the risks associated with the design of their [individual] DII products to ensure ongoing sustainability.”

Aside from the sustainability measures, APRA has resumed its work requiring the industry to address flaws in product design and pricing that have caused individual DII providers to lose $3.4 billion in the last five years.

APRA also announced last October providers face additional upfront capital penalties if they fail to improve the sustainability of their products.

Click here for the letter.