Australian life and health insurers face margin pressure from volatile claims and lapse experiences and uncertain new business profitability, according to a report by AM Best.

“Loss experience from existing disability protection policies is likely to continue the current trend until claims have fully emerged and claims management strategies show their effects,” the ratings agency says.

A weaker economic environment has contributed to problems, with people seeking alternative income more likely to claim through total and permanent disability (TPD) or income protection benefits.

Loose claim conditions for mental illness and growing awareness may have contributed to a rise in stress-related claims from white-collar workers, according to industry sources quoted in the report.

Economic conditions have also driven policy lapses and reduced coverage, with weakening consumer sentiment cutting discretionary spending and increasing cost-consciousness.

In the group risk segment, which includes large super funds, policy terms have been “enriched” and claims conditions loosened in recent years, amid intense competition among providers.

“TPD premium rates proved to be inadequate for the risks taken,” AM Best says. “This was reflected in RGA’s decision to exit the Australian group TPD market [this year].”

The problems have highlighted issues related to front-end loaded commissions and age-based premium structures.

In the long term profitability is likely to be restored, given adjustable premium rates for yearly renewable term products and ongoing adjustments on group risk products, the report says.