The Australian Prudential Regulation Authority (APRA) warns the troubled individual disability income insurance (DII) product line faces possibly more losses in the coming months because of the COVID-19 pandemic fallout.

In a 2020 Year in Review report, the prudential regulator says the life industry “remained challenged”, as profitability of risk products substantially declined in recent years largely due to individual DII.

“The health and economic impacts of COVID-19 put added additional pressure on the industry’s already subdued earnings,” APRA said.

“The year saw a continuation of the poor performance trend of prior years, with substantial losses incurred in risk products such as individual DII, primarily caused by adverse claims experiences.”

APRA says its decision to implement upfront capital penalties last October on providers who fail to improve the sustainability of individual DII covers reflected its “concerns with the scale of losses in the industry”.

“Individual DII is a valuable product that provides policyholders with replacement income when illness or injury prevents them from working.

“However, product design and pricing issues have seen the industry lose more than $4.8 billion in the last six years, and some policyholders have faced frequent and significant premium increases.

“APRA will remove the capital penalties when providers demonstrate they have addressed riskier product features, and improved their risk governance and data practices.”

APRA says the losses could worsen further as individual DII “is likely to be the product most vulnerable to the ongoing impact of the COVID-19 pandemic”.

Click here for the 2020 Year in Review report.