An increase in the demand for longevity solutions is necessary for insurers to be incentivised to develop a business case to invest in this arena, and accurately and sustainably price risks.
Participants of the Australian Prudential Regulation Authority (APRA) annual life insurance CEO roundtable on 17 July 2024 noted that, if the demand challenge was addressed, there would be sufficient capital and support from life insurers’ parents to back the offering of those longevity solutions.
The participants believed that the limited demand by the Australian community is driven by several factors, such as:
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limited awareness of longevity products;
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misconception about longevity products; and
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a ‘nest egg’ mindset which results in a preference to preserve an account balance.
Participants noted that this is not the case for defined benefit members who tend to have an income stream mindset, according to a statement released by APRA.
The regulator noted that based on its overseas study, countries that have a high level of take-up of longevity products are those with a strong level of compulsion or incentive provided by the government.
Participants commented that there is a genuine need for longevity solutions for certain cohorts of retirees, but those needs are often not recognised by the retirees.
APRA was encouraged to hear that some insurers are proactively engaging with trustees on their retirement income strategies and taking steps to improve awareness and understanding of longevity solutions, including developing educational materials for superannuation members. Such collaborative effort will make a positive difference in improving member engagement and financial literacy, an area identified as a key challenge by trustees in the pulse check on retirement income covenant implementation.
Innovation
Participants observed insurers’ hesitation to innovate and introduce new products in the absence of adequate support mechanisms if the products do not achieve scale to be sustainable. Participants noted the current legislative settings limit the ability of insurers to rationalise legacy products and that this stifles innovation.
Establishing a legacy rationalisation mechanism would allow insurers to innovate safely and manage products that no longer meet member needs. Whilst APRA sees potential merit for such a mechanism, APRA encourages life insurers to take a considered approach to product development, based on meeting retiree needs and supported by a robust business case.
Next steps
Australians are transitioning into retirement in ever-growing numbers and with increasingly higher account balances. The need for innovative retirement offerings that help to address longevity risk for relevant cohorts presents a real opportunity for the life insurance industry. APRA encourages insurers to continue to work closely with superannuation trustees to help members better understand longevity risk and the role of longevity solutions in mitigating that risk.
Hosted by APRA member Suzanne Smith together with executive director Sean Carmody and general manager Nancy Ma, the roundtable was attended by 21 life insurance CEOs and other executives, as well as representatives from Treasury, ASIC, and the Council of Australian Life Insurers.