Rating agency raises individual DII profitability alarm

S&P Global Ratings says individual disability income insurance (DII) profitability could “deteriorate”, following similar warnings from the prudential regulator.

“Despite improving individual DII profitability over the past two years, there remains the risk that claims experience could deteriorate,” the rating agency said in an industry update.

S&P says providers are still exposed to legacy policies underwritten prior to the Australian Prudential Regulation Authority’s (APRA) intervention in December 2019.

“These policies include features that ease access to benefits and disincentivise return to work such as long benefit periods and liberal medical definitions,” S&P says.

This month APRA listed individual DII as among its supervision priorities, after expressing concerns at the end of last year over the product line’s financial state.

It said recent profits reported by the individual DII market were partly driven by Covid-19 reserve releases and financial markets movements that favoured insurers.

APRA said new individual DII products that reflected APRA’s expectations were introduced in October 2021 but points out “irresponsible” market behaviour remains a risk requiring strong vigilance by both APRA and insurers.

S&P says in the update it expects life insurance profitability to strengthen over the next 12 months, citing rises in premium rates across all lines.

Higher interest rates will also bump up profitability as insurers release reserves on long-tail products and benefit from higher yield on reinvestment.

Meanwhile consultancy Bain & Co Partner Mark Judah says the life industry is set for a rebound after significant challenges in the last few years.

He says the last five years have been challenging and disruptive for the industry, with significant regulatory challenges, a declining number of lives insured and very little premium growth.

“Fortunately, we see early signals suggest that the life insurance industry could be about to turn the corner, with higher interest rates and potential regulatory changes that enable insurers to better meet customers’ protection and longevity risk needs,” he told insuranceNEWS.com.au.

“We expect to see price growth broadly in line with claims inflation as insurers protect margins. And we expect a return to growth in lives insured across group and individual markets with upside for growth in direct channels in the retail advised channel, in light of potential regulatory changes.”