The shrinking pool of people holding life insurance is pushing up premiums, ANZ says in its submission on the Financial System Inquiry’s interim report.

“Higher premiums reduce affordability, potentially creating an adverse cycle of increasing lapse rates and reduced sustainability,” it says.

Broad definitions for declaring people totally and permanently disabled have also driven premiums, the bank says. This has led to a rise in legal claims.

“Apparent product complexity and premiums that rise with age also contribute to high lapse rates.”

ANZ believes new rules and approaches could improve the life insurance industry’s sustainability.

“Early intervention and rehabilitation, as an alternative to potential permanent and total disability claims, could be encouraged,” the submission says.

“This would improve outcomes for individual consumers and, over time, improve life insurance affordability and take-up, by reducing pressure on premiums.”

The bank concedes this approach would require changes to the Private Health Insurance Act, to let life insurers compensate for rehabilitation expenses after accident or illness.

ANZ also suggests limiting claims periods for life products – perhaps at seven years, similar to NSW workers’ compensation claims.