Regulators take aim at ‘level’ life insurance premiums

The nation’s financial regulators are investigating the potential mis-selling of life insurance policies, with a particular focus on level premiums.

The nation’s financial regulators have ordered life insurers to review past premium hikes and report back by the end of March.

The nation’s financial regulators are investigating the potential widespread mis-selling of life insurance policies, ordering life insurers across the country to comb through past premium hikes and report back on their findings by early 2023.

In a letter sent to all life insurers on Thursday, the Australian Prudential Regulation Authority and the Australian Securities & Investments Commission detailed their concerns, in part following complaints from consumers, related to premium increases, particularly for products advertised as ‘level’ premium policies.

“We are concerned that some life companies have not appropriately applied premium increases to retail life insurance policies, particularly level premium policies, in accordance with the policy terms; and/or have not acted in accordance with the reasonable expectations created through the relevant disclosure and marketing material,” the twin regulators wrote.

The letter goes into further details, with ASIC and APRA stating: “These concerns indicate that some life companies do not have effective systems, processes, and controls in place to ensure clear and effective disclosure has taken, and continues to take, place; that all premium changes are made in accordance with the applicable documents that form the contract between insurer and consumer; that marketing material and other documents are not misleading; and continued compliance with their legal obligations, including to act efficiently, honestly and fairly.”

The regulators are understood to have taken issue primarily with ‘level’ premiums, which are supposed to spread the cost of insurance more evenly over the life of a policy than the alternative, a stepped premium.

Policyholders of level premiums typically pay a higher premium when they first take out insurance than someone on a stepped premium, but are billed as cheaper over the long term because the price stays the same over many years.

However, pricing can increase in these level policies due to outside factors, including inflation. Part of the financial regulators’ investigation will likely home in on whether this was adequately disclosed to consumers.

Already, a number of life insurers are believed to have self-reported such issues to the regulators, with remediation programs in prospect once investigations are complete.

Before taking further action, the regulators have ordered all life insurers to review past premium increases, including for legacy products, to determine whether increases or repricing decisions had been applied in accordance with the applicable policy terms.

Insurers must also check past disclosure and marketing material to determine whether policyholders were provided sufficient clarity about future premiums, including the way in which premiums may change over the life of the policy.

All life companies have been asked to disclose to ASIC the findings of their reviews by March 31.

Originally published as Regulators take aim at ‘level’ life insurance premiums