MunichRe is the largest reinsurer of disability income business in Australasia. It says the latest Australian Prudential Regulation Authority (APRA) statistics show Australian insurers reported after-tax losses of A$394 million in their retail disability income insurance (DII) businesses in the last quarter of 2014.

"These quarterly figures reveal that insurance companies have been having difficulties in the retail DII market for a number of years, sustaining net losses of over half a billion dollars in 2014 alone. This has ramifications and lessons for New Zealand life insurers as there are similarities to the Australian market."

Munich Holdings of Australasia (MHA) has conducted a major investigation which its says,  brings to light just how much trouble the disability insurance market is in.

"There are serious concerns regarding the sustainability of current retail DII products."

It has conducted an extensive analysis using biometric experience data from 2004-2013.

"This in-depth coverage of the Australian market has allowed MHA to develop new insights regarding the risk factors that drive DII experience," it says.

Following the analysis it has made "the significant decision to discard the industry-standard actuarial table". This table is more than 20 years old, and is being replaced it with a new contemporary table developed in-house.

The results of the analysis highlighted that the long-term cost of claims is significantly higher than allowed for in office premium rates. Key results include:

1. The cost of DII claims has been increasing over the last decade. This is due to an increase in the incidence of claims, rather than any change to the recovery rates of DII claimants.
2. The rate of claims due to sickness increases with policy duration. The increase is significantly higher than the industry is pricing for. Sickness claim rates for policies in force for 12 years are double that of policies in their first year.
3. The incidence of accident-related claims (overall) is increasing. From 2009 to 2013, there was a significant increase of 47% in the rate of accident claims occurring.

MHA's Head of Life, Andrew Linfoot, said "Our research has revealed that current products typically have claims costs that are 20% – 35% above levels that would deliver a reasonable return for shareholders. This suggests that life offices are adding losses to their books with each new retail DII sale.”

"Price, while a major factor, is just one of the key factors contributing to the state of the market. Over time, DII benefits and other terms and conditions have become more generous, which has contributed to increasing claims costs,” he said.

Linfoot acknowledged the many barriers to change, saying “There are a number of reasons why insurers may be reluctant to move. However, I question the extent to which products can be sustained in the longer term, if steps are not taken to develop a more sustainable offering. Industry participants may face a scenario where their products quickly become unaffordable to the many people who rely on such products for their financial protection.”

In response to the findings, MHA has developed what it believes is a more sustainable and cost effective DII product, removing costly features that move cover away from the principles of insurance.

“The new product aims to address technical and behavioral weaknesses within the current product design, and is better aligned to the needs of the customer,” Linfoot said.

To remedy the situation, Linfoot suggested that “Each insurer needs to identify and address the causes that have led to these concerns. A return to sustainable and sound design must become a priority if the long-term future of DII is to be achieved.”

He says MHA is determined to bring the issues sharply into focus and is committed to working with industry participants on both sides of the Tasman to tackle the problem head on.