The wider insurance industry must take radical steps to fix individual disability income (DII) business, a new white paper says.

The white paper addresses a number of fundamental problems with individual DII business, including product design, deficient product ratings from ratings agencies and shortcomings from employers.

The paper’s author, General Reinsurance Life Managing Director Andres Webersinke, says most initiatives have not dealt with the fundamental problem of individual DII business. This is the fifth consecutive year of losses in individual DII.

“Attempts in changing the product end in smoke. Is the industry unable to self-help? And adding to this, demands to meet increasing consumer expectations, while understandable and important, may – at least in the short term – worsen the current situation,” he says.

Product manufacturers need to be bold and lead the change, Mr Webersinke says.

The industry needs to question whether under-pricing or poor product design is responsible for the unpredictability of DII pricing and act accordingly, he says. Actuaries haven’t been able to predict the future risk of DII products well enough and the basic premiums rates have gone up 30% over a few years.

“Given the losses made and the fact that premium levels trail actual experience, it is questionable why the market continues offering generous premium discounts,” he says.

The white paper argues that over-insurance needs to be reduced by reducing product features and taxing payments to reduce premium levels.

Overdesigning feature rich products may not be in the interests of the consumer, it points out. Certain features like paying benefits during the waiting period and failing to offset benefits from other sources lower the financial incentive to return to work, while some features don’t reflect actual need.

“Undoubtedly, each of these features was designed with good intentions and may have resulted from a shortcoming identified in a previous product generation when assessing one particular claim; however, the impact on an entire portfolio was not well researched.”

The approach to claims-handling is based on misunderstood customer centricity, the paper says. Most claims philosophies are designed around valid claims and how to approach them, but not all claims are equally valid, and insurers need to focus equally on identifying non-disclosure, invalid claims at inception, and continuous validity.

The Hayne royal commission set “community expectations” as a new norm for insurers, but this could easily mutate into an entitlement mentality, which no voluntary system can survive, Mr Webersinke says.

Ratings houses are also only quantifying the “generosity” of a product without regarding the impact that will have on future premiums, and this stifles innovation for more sustainable products, he adds.

“The scoring methodology leads to a race of ever-increasing product generosity… [and] a convergence of policy terms and conditions.”

DII must be redesigned as a two-in-one product covering both an acute temporary sickness, and add-on cover for extended sicknesses, with clear expectations for the insured to find other work.

The report also outlines the problem with gathering multiple occupations in one category. All medical professions are benefiting from a relatively favourable premium level, the paper says.

Employers must accommodate the employee’s new physical capacity in the workplace to reduce the loss of income and mustn’t rely solely on the employee’s motivation, it says.

Insurers earned $2.8 billion of premium from this product in the 12 months to March this year – 30% of total risk business sold to individuals, and one of the highest penetration rates in the world.