Australia is trying to overhaul the public programs that protect citizens against the risk of disability, but problems with existing commercial disability products are what's giving insurers there headaches today.
Reinsurance Group of America Inc. has responded to the trends in the Australian disability market by suspending all new sales of one type of reinsurance -- for group total and permanent disability in Australia -- and being "extremely selective" in other areas of the country's group insurance market.
RGA is reporting a $50 million net loss for the second quarter on $2.6 billion in revenue, compared with $141 million in net income on $2.4 billion in revenue for the second quarter of 2012.
Profits in most operating units were up, but, in the Asia Pacific unit, includes Australia, the company is reporting a $286 million pre-tax operating loss, compared with $23 million in net operating income for the comparable quarter in 2012.
The company is taking a $184 million charge in the quarter, and most of the charge reflects an increase in reserves for reinsurance for "total and permanent disability" (TPD) coverage.
TPD coverage provides a lump-sum payment to insureds who suffer severe disabilities.
In Australia, direct writers have been selling TPD coverage as an add-on bundled together with "superannuation funds," or mandatory retirement funds, RGA executives said during the company's second-quarter earnings call.
Many of the direct writers in Australia have been offering TPD coverage as a benefit retirement fund participants can get without going through an underwriting process.
The job market has softened in Australia in recent years, and, in some cases, Australian lawyers have been encouraging people with health problems to tap their TPD benefits.
RGA increased Australia TPD reserves because it found, when it looked at its TPD block of business, that the business is deteriorating rapidly and seems to be likely to continue to deteriorate.
"In our opinion, the group TPD market in Australia became extremely competitive about five years ago, about the same time that insured benefits became richer in terms and conditions, weaker in the marketplace," Woodring said. "Looking back, we realized we missed the fundamental change in the market and the impact it should have had on pricing."
RGA also is working with clients to improve theclaims adjudication process, Woodring said.
RGA executives said problems with the TPD business and ordinary group disability insurance business in Australia seem to be unique to Australia.