Further losses are likely in store for the life industry after it made an aggregate loss of $1.3 billion in the last financial year, compared with an $800 million profit in the previous year.

KPMG says in an annual review of the industry that insurers have struggled to turn around unprofitable risk products and contain the claims fallout from COVID-19.

Overall direct premium income, a measure of industry revenue, fell 6.1% to $17.3 billion in 2019/20, while losses from risk products blew out by another $1 billion to $1.4 billion.

The profitability of risk products – group lump sum, group disability income, retail disability income and retail lump sum – was strained by increasing policy liabilities and claim expenses.

Claims as a proportion of premium across all risk products continued to worsen, rising by 4.3% to $15.3 billion. In 2017/18 and 2018/19, claims cost grew by 1% and 4.1% respectively.

“Trending experience may be further impacted by the uncertainty generated by the COVID-19 pandemic,” KPMG says in the review.

Retail disability income insurance was the worst-performing product, losing $1.2 billion during the period. Group lump sum lost $352 million and group disability income lost $249 million, while retail lump sum – the only profitable product – made $422 million.

KPMG says operating conditions are not expected to improve, citing challenges from the pandemic and insurers’ struggle to improve the sustainability of risk products, particularly for retail disability income.

“The life insurance industry faces significant challenges in responding to the impacts of COVID-19 while attempting to make genuine progress in addressing profitability issues that are acknowledged by all participants as not being sustainable,” the report says.

“Progress towards a more sustainable position requires action on multiple fronts. Work in addressing the future product design is critical.

“However, this needs to be accompanied by a coherent strategy that takes into account the pricing of in-force books, effective and efficient claims management, overall expense management and targeted distribution strategies.”

The Australian Prudential Regulation Authority (APRA) this month informed the industry it has resumed its work requiring insurers to address flaws in the design and pricing of retail disability income products.

It warned that insurers who fail to take adequate actions will face additional upfront capital penalties.

KPMG Insurance Lead Partner David Kells says it will take time for insurers to market new retail disability income insurance products. At the same time they still have a book of existing contracts with the old features that need to be managed.

“The main tool that insurers have to address the profitability issues is repricing,” Mr Kells told insuranceNEWS.com.au. “There is an opportunity to reprice each year.

“However, insurers need to balance repricing with customer retention if you want people to continue to hold the product. It’s a slow process to do that.

“It’s therefore likely the issues that have generated the losses for the last couple of years will continue for a time.”

Mr Kells says that despite the losses the industry is in a strong capital position, “which means they are well placed to make the necessary changes to return to profitability.”

Click here to access the annual review.