The profitability of the life insurance sector is no longer sustainable, the Reserve Bank says.

Its financial stability review – published last week – blames persistent structural issues, historical under-pricing of long-dated policies, loose product definitions, overly generous benefits and higher than expected claims, saying these have caused profits to decline below the cost of capital.

“Life insurers are taking steps to address this, but the long-term nature of life insurance contracts means it could take some time to correct,” the review says. The pressure to maintain market share in a competitive market will also delay improvements.

Disability income insurance is behind the recent decline in profits, as these issues have affected this sector most of all, it says.

The RBA says the recent changes to insurance in super, a proposed ban on phone sales of life insurance and a review of life insurance commissions will pose further challenges, but the recent change in ownership of life insurers should help.

“These new owners have underwriting expertise, scale and strong financial resources which should have them well placed to undertake the necessary change,” the review says.

“High levels of capital – equivalent to 1.8 times the prescribed amount – will also support insurers in addressing these issues.”

It notes that insurance in super changes have affected the value of AMP’s life insurance business. The Protecting Your Super legislation and higher reinsurance costs in New Zealand have reduced AMP Life’s profit to $116 million in the first half of the year, compared to $143 million at the corresponding time last year.