The product design and pricing decisions behind disability income insurance may be harming the long-term interests of policyholders, the prudential regulator says.

The Australian Prudential Regulation Authority (APRA) says life insurers must consider the risks associated with pricing decisions and new product development if they are to improve products’ performance and sustainability.

Life Insurers have recorded losses in this line for four of the past five years. The worst loss was $598 million in 2014. Last year’s loss was $474 million.

APRA says most life insurers are reluctant to deliver simpler, more sustainable disability income insurance products due to first-mover disadvantage.

It wants changes to ensure they continue offering the products.

Product design needs to be more robustly aligned with common principles of insurability, it says.

Disability income insurance sold here often contains features that make it riskier than that sold overseas. Boards need to improve strategy and risk governance, with appropriate oversight.

APRA is urging the industry to help it gather better data to study the problem.

It warns it will apply greater scrutiny to life insurers and consider imposing a charge on their capital requirements if action plans proposed by companies are inadequate.