Unprofitable inforce individual disability income policies will dominate loss outcomes for the next decade until more profitable business grows, Rice Warner warns.

There are few short-term improvements available, even if insurers stop writing unprofitable new business, it says.

Life insurers have recorded losses in this line for four of the past five years. The worst loss was $598 million in 2014. Last year’s was $474 million.

The Australian Prudential Regulation Authority has warned life insurers to improve the sector’s performance and sustainability, saying product design and pricing decisions are harming policyholders’ long-term interests.

Rice Warner says product overdevelopment and the addition of too many benefits has led to disability income cover’s problems.

Multiple stakeholders including (re)insurers, advisers, business development managers, ratings houses and customers exert a negative influence over the sales and product development process, it says.

Over the past decade, manufacturers have designed highly complex products containing multiple features and ancillary benefits to satisfy financial advisers and business development managers. Many of the product features are contradictory to affordable premiums, Rice Warner says.

Yet ratings houses are placing more value on affordable premiums.

The financial adviser best-interests duty ensures advisers recommend only the best products, encouraging further product development, it says.

Premium increases over the past 10 years have not been enough to cover emerging claims costs, and selective lapsing must surely be occurring, worsening claims for closed books. This cannot become an ongoing cycle, Rice Warner says.