Legislation should be introduced to allow the rationalisation of life insurance legacy products, according to the Australian Prudential Regulation Authority (APRA).

Legacy products last many years after active sales have stopped, but the original contract terms must be maintained.

“Legacy products often last a lifetime, but the financial, legal and social environment continually changes,” the regulator says in a submission to the Senate Economics References Committee inquiry into financial advice.

“In addition, the life insurance sector has undergone a significant consolidation over the past 20 years, leading to many duplicated and outdated products.”

APRA says life insurers regularly introduce new products to better reflect consumer demand and changed market conditions, but they must maintain legacy products at great cost.

“Legacy products become more complex and expensive to administer and may no longer meet the requirements of the beneficiaries. The cost of these legacy products is ultimately borne by the policyholders.”

APRA argues that without legislative change to allow alterations to contracts, policyholders are being disadvantaged.

“It is very difficult to rationalise legacy products in the absence of a legislative mechanism, because each policyholder would need to consent to any changes.

“A policyholder may not be able to switch to a newer product or provider readily, because their health status may have changed in the interim, meaning they either cannot obtain replacement insurance or can only do so at significantly increased cost.”

An insurer cannot move a policyholder, even when it is in their best interests, due to the complexity of closing down a product under current legislation.

“The benefits of a simpler, though still robust, mechanism to rationalise legacy financial products has been recognised for some time,” APRA says. “As noted in the Financial System Inquiry final report, between 2007 and 2010 government worked with industry to develop a mechanism to facilitate product rationalisation.

“However, such a mechanism was not finalised or implemented.”