Disability income insurance (DII) policies have the highest claims paid ratio for all distribution channels, prompting the prudential regulator to issue another warning about the sustainability of the troubled line.

Policies sold through individual non-advised channels have a payout ratio of 120%, group super 105%, group ordinary 97% and individual advised 77%, according to new data released last week by the Australian Prudential Regulation Authority (APRA).

“While a ratio of over 100% suggests good value for policyholders, this is not sustainable and will threaten the ongoing availability of [individual DII] for the Australia community in the future,” APRA said.

The regulator says it is working with the industry to move the product to a sustainable state and thereby deliver better outcomes for policyholders.

Death, total and permanent disability, trauma, consumer credit insurance, funeral and accident cover are the other products included in APRA’s claims and disputes outcomes report for 20 Australian life insurers writing direct business.

The latest data covers a rolling 12-month period from January to December.

The DII market, in particular individual offerings, has been an area of concern for APRA, with the regulator announcing last October providers face additional upfront capital penalties if they fail to improve the sustainability of their products.

APRA has also resumed its work requiring the industry to address flaws in product design and pricing that has caused the product line to lose $3.4 billion in the last five years. The work was put on hold because of the pandemic disruption.

Industry leaders who spoke at a Financial Services Council-organised life insurance summit last week also agreed the present situation is untenable.

“Frankly I don’t think the current position can continue,” TAL Group CEO and MD Brett Clark said.

“There are no winners in this situation and if it does continue, then the potential endgame looks pretty bleak and that is that industry losses continue, capital retreats and in some cases it already has, and then the products are not offered at all or if they are, the price points are going to be out of reach for most people.

“In my view, the [DII] products are no longer fit for purpose and we are at a point now that requires real material and sustainable change and it’s not just tweaking around the edges.

“Unless we make that real and material change, I think the [individual] DII market is at risk of failure. The Actuaries Institute called that out.”

The Actuaries Institute established in 2019 a Disability Insurance Taskforce to look into ways to reform the DII market.

Taskforce Convenor Ian Laughlin told the life insurance summit “you can’t just tinker with the product”.

“Even making significant changes to the product is not enough if you’ve got an unhealthy ecosystem,” Mr Laughlin said. “So we’ve been looking at ways to improve the health of the whole ecosystem.”

He says the taskforce is in the process of finalising its position on the list of proposed reform measures.

Click here to access the APRA report.