Individual disability income insurance (DII) providers must immediately work on turning around the money-losing product line or face additional upfront capital penalties from the Australian Prudential Regulation Authority (APRA).

APRA issued the warning in a letter last week to the industry, announcing it has resumed its work requiring the industry to address flaws in product design and pricing that caused providers to lose $3.4 billion in the last five years.

The work, which includes punitive capital charges on providers that fail to take adequate action, was put on hold in March because of the pandemic disruption.

APRA says it is commencing the work again having concluded the industry “can wait no longer” to address the problem areas threatening the long-term viability of individual DII products in Australia.

“Our assessment is that the pandemic may further exacerbate the problems with this product, so decisive action can no longer be delayed,” APRA Executive Board Member Geoff Summerhayes said.

“[Individual] DII plays a valuable role in providing replacement income to policyholders when they are unable to work due to illness or injury.

“APRA wants to ensure it remains available to Australians who need it, but that won’t happen if life companies continue to haemorrhage money through the sale of [individual] DII.”

The prudential regulator has set out a number of measures it wants providers to implement to better manage riskier product features.

These include ensuring individual DII benefits do not exceed a policyholder’s income at the time of claim, and ceasing the sale of agreed value policies. They are also to avoid offering policies with fixed terms and conditions of more than five years, and must put in place effective controls to manage the risks associated with longer benefit periods.

APRA says the progress of each life company in meeting its expectations will be taken into account in adjusting that entity’s individual DII capital charge.

The charge each life company must put aside was set in December last year when APRA first announced it was imposing additional capital requirement to try to return the sector to a sustainable path.

For more on the APRA measures, click here.