“Decisive action” is needed to tackle sustainability pressures on total and permanent disability cover, regulators told a recent roundtable with life insurers and Treasury.

“There was broad consensus that the challenges facing TPD insurance are significant and likely to persist without action,” the Australian Prudential Regulation Authority and Australian Securities and Investments Commission said.

“Participants noted that TPD claims experience has deteriorated across both group and retail markets, driven in particular by the increasing incidence and complexity of mental health-related claims.”

Pressures on TPD have already created affordability challenges for consumers and financial volatility for insurers, the regulators say.

“Achieving sustainable outcomes will require insurers to take decisive action in areas within their control, including the consistent and effective application of sound insurance risk management practices.”

Product design is an area of potential action.

“While participants highlighted legislative constraints are limiting the scope for product change, there are examples where some insurers are actively exploring and piloting new approaches within the current settings,” the regulators said.

“APRA acknowledged potential benefits with legislative changes but emphasised that insurers should not delay taking actions in areas that are within their controls.

“ASIC agreed that insurers should take action in areas within their control, while also ensuring their products are designed with the needs of their intended target market in mind.”

In the retail market, new TPD product designs have emerged, but take-up remains low and previous offerings continue to dominate the adviser-led space.

“Questions were raised on whether existing products are appropriately priced to reflect the latest TPD risk profile,” the regulators said.

“In this context, APRA emphasised the importance of robust reserving and pricing practices, so that assumptions keep pace with the latest claims experience and emerging risk trends.

“ASIC emphasised insurers must continue to handle claims in accordance with the relevant policy terms and their legislative obligations.”