The Australian Prudential Regulation Authority (APRA) will ensure life insurance companies fully understand the implications of the Federal Governments reforms to the advice and superannuation industries.

The Future of Financial Advice and Strong Super reforms will have “potentially significant impacts on the business models and distribution systems of life insurers,” APRA says in its 2011 annual report.

“APRA will be working with life insurers to ensure that they fully understand the prudential implications of these reforms and their flow-on consequences for governance, operational risk and product risk.”

The regulator has also expressed concerns about the governance of life insurance products offered directly through call centres or online.

“Often, the products are being offered through third-party providers and APRA has no issue with the use of direct marketing channels,” it said.

“But it is concerned the appropriate governance, pricing and operational management frameworks are being applied to the design, distribution, underwriting and claims management of these products.”

The regulator says it is talking to life insurers to make sure the risks, including reputational risk, are being managed correctly.

Another area of concern for APRA is group life insurance and the increasing size of accounts.

It notes group life insurance now accounts for a third of the industry although profits are lower.

The consolidation of superannuation funds has altered the buying power of these organisations and this is causing some concern for APRA.

“Group life contracts are reaching a size that is testing the capital and operational capacity of some of the participating life insurers,” APRA said.

“This is giving rise to operational and strategic risk when these contracts are won and concerns that premiums will not prove sustainable.”

The regulator says it will continue to monitor developments in the sector with a particular focus on the capital support, pricing disciplines and operational management of these contracts.

“An additional area of attention will be the pricing and capital management practices that insurers put in place for reserving against shocks such as a pandemic or a marked increase in disability claims,” it said.