Life insurance industry ’unsustainable’ warns APRA

Major insurers are knocking back huge numbers of claims, but the industry watchdog is warning payouts are still unsustainable.

Some insurers are denying up to a third of all life insurrance claims. Picture: iStock

Some of Australia’s biggest insurers are knocking back more than one in three life insurance claims as new data from the prudential regulator reveals the precarious state of parts of the sector.

In a biannual release of data, the Australian Prudential Regulation Authority revealed heavyweight TAL had knocked back more than one in three total and permanent disability insurance advised claims in 2020.

TAL holds 10.4 per cent of the TPD market, with 121,000 insured customers.

AIAA was also high in the pack, knocking back 29.2 per cent of claims.

Westpac followed close behind, rejecting 23 per cent of claims.

This was contrasted with few rejections by any insurers on disability and injury insurance claims, lead by AIAA, which only knocked back 9 per cent of finalised advised claims.

Advised claims are claims on policies bought through a broker, as opposed to directly.

But APRA said the high level of payouts on Disability Income Insurance (DII) claims, while “good value for policyholders” was “not sustainable and will threaten the ongoing availability” of the policies.

“With the release of the final sustainability measures and the introduction of the individual DII capital charge, APRA is working with the industry to move the product to a sustainable state and thereby deliver better outcomes for policyholders,” the regulator said.

The data found DII had payout ratios above or near 100 per cent across multiple channel types in the 12 months to December 2020.

This strongly contrasted with payouts in other cover type categories, with payouts near their worst across group policies held through superannuation.

The payout ratio was worst in the individual non-advised channel for DII, where it reached 120 per cent.

This was followed by claims through group superannuation cover where payouts notched 105 per cent.

The group ordinary category, which covers policies bought by businesses for their employees, came dangerously close to the ceiling reaching 97 per cent payouts.

Despite many claims being blocked by some insurers, total and permanent disability insurance was the next worst performing category for payouts.

Australian Prudential Regulation Authority (APRA) chairman Wayne Byres at the House Economics Committee hearing at Parliament House in Canberra.

The sector, which has been heavily targeted by law firms seeking to assist Australians make claims on policies, saw group super payouts reach 97 per cent.

Berrill and Watson principal John Berrill said the size of payouts from insurers across several product categories was a major issue that threatened the viability of the sector.

“Payouts of 120 per cent is completely unsustainable, that trend can’t continue and it’s got to be reigned in,” he said.

Mr Berrill said the massive growth in payouts had been driven by an expansion in coverage in recent decades coupled with more aggressive action by law firms to assist people to make claims.

“There is no doubt that people’s awareness of insurance inside super 20 years ago was low and what lawyers have done such as myself is we made people aware of what they were covered for and what their rights were,” he said.

“We need a reset through the use of standard cover and minimum terms and conditions.”