The Australian Prudential Regulation Authority (APRA) will impose an upfront capital requirement on all individual disability income insurance providers from March 31 next year until they develop sustainable products and pricing.

The aggressive response comes as the industry reports a further $1 billion loss in the sector since May. It has lost $3.4 billion over the past five years.

APRA life insurance statistics released last week show disability income insurance is largely responsible for a steep decline in industry profits to just $200 million to September this year.

The spectre of insurers pulling out of the market is now a genuine risk, with at least one major reinsurer indicating it wasn’t prepared to reinsure individual disability income insurance.

APRA Executive Board Member Geoff Summerhayes blasted insurers’ practices of keeping premiums low and designing products with excessively generous features and terms.

“Insurers know what the problems are, but the fear of first-mover disadvantage has proven to be an insurmountable barrier to them making the necessary changes,” he said. “By introducing this package of measures, APRA is forcing the industry to better manage the risks associated with disability income insurance and to address unsustainable product design features – or face additional financial penalties.”

APRA will impose additional license conditions if insurers don’t act to fix the problems.

It expects the industry to fix disability income insurance products so that benefits don’t exceed the policyholder’s income at claim time, ceasing selling agreed value policies, stop offering policies with fixed terms and conditions of more than five years, and properly manage the risks associated with longer benefit periods.

APRA sent out a letter to the industry in May addressing these concerns, but it says there has been “no discernible signs of improvement” since then. It will also start collecting data on the sector to help it monitor the industry’s progress in meeting its expectations.

“Unless insurers stop losing hundreds of millions of dollars each year, it’s only a matter of time until individual DII – and the protection it provides – is no longer available at all,” Mr Summerhayes said.