The prudential regulator has listed individual disability income insurance (DII) as among its supervision priorities, after expressing concerns at the end of last year over the product line’s financial state.

The Australian Prudential Regulation Authority (APRA) says it remains committed to its program to support the long-term sustainability of individual DII and has not ruled out the prospect of capital measures if the situation calls for it.

“In 2023, APRA will maintain its individual DII market monitoring activities and take action to ensure the gains of the past few years are not eroded,” the regulator says in its Supervision Priorities Information Paper released last week.

“In addition, APRA plans to review the progress of several individual life insurers in meeting APRA’s product sustainability expectations to assess whether a change in their individual DII capital charge is warranted.

APRA says it will consider the quality of insurer decision-making and will look for evidence of challenge from the boards and risk function as part of its review.

The regulator says new individual DII products that reflected APRA’s expectations were introduced in October 2021 but points out “irresponsible” market behaviour remains a risk requiring strong vigilance by both APRA and insurers.

At the end of last year APRA flagged its concerns over the individual DII line, urging providers to stay focused on improving pricing and product features.

It says recent profits reported by the individual DII market were partly driven by Covid-19 reserve releases and financial markets movements that favoured insurers.

“At first glance, the recent run of reported profits in the individual DII market looks promising for an industry that has been plagued by sustainability issues,” APRA said.

“However, since the net gains from improved bond yields and the Covid-19 reserve releases that have contributed to recent profits are cyclical events, that could reduce or reverse.”

APRA says overall the industry continues to forecast future losses, albeit less than previously.