There are very big changes afoot with income protection insurance policies across Australia so its very important to check with your insurance adviser and see if you are effected asap.
Our good friend and life insurance guru Cameron Peck, Director at Safeguard Life has put together a great article (below) for our clients on what has changed and the implications. We highly recommend that anyone that has or is looking to get income protection insurance have a good read of this. Cameron’s details are the bottom of the article and as a foremost expert on the topic he is always happy to chat about all things life insurance.
Shock changes to income protection insurance
In an unexpected and unprecedented move, APRA has recently enforced change to the Income Protection landscape, reducing the ability of new policy holders to claim on their cover. Plans to further reduce the quality of cover are in consultation with industry and are targeted for rollout next year. It seems counter intuitive to many consumers that a regulator would disadvantage the policy holder over big industry, however this has been labelled an industry ‘sustainability’ issue.
Where it went wrong
The rest of the world has watch on as Australia has seen high levels of competition over the past 15 years in the income protection market. In a strong ‘Adviser Led’ distribution model in Australia, clients have been benefiting with insurers looking to outdo each other. This came in the form of enhancements to the strength of their policy definitions, policy structures and discounts. Strangely, income protection has always been the least profitable for insurers. So why enhance your products while financially unsustainable?? …a grab for market share was unfolding between the big insurers.
The only financial cushion was that other products, such as Life insurance, TPD and Trauma cover were often more profitable and therefore cross subsidising a lack of profitability from income protection cover.
Well this all changed earlier this year…
APRA stepped in and made some wide-sweeping changes, while also warning:
- Insurers must “address flaws in product design and pricing that are contributing to unsustainable practices”; and,
- The Australian income protection market has ”excessively generous features and terms that, in some cases, provide a financial disincentive for policyholders to return to work”.
Our domestic income protection policies may have become some of the world’s strongest, but they also became the least sustainable. In recent months, APRA released a report showing that the insurance industry has lost a collective $3.5Billion over the past 3 years. Further they identified that 12 out of 28 Australian Life Insurers traded at a loss in 2019. The worst single insurer had a staggering loss of $614m for the year!
How did APRA Intervene?
APRA imposed a series of measures to remove core strengths of these ‘Retail’ Income protection policies. Existing policy holders will be unaffected… for now…many believe that existing policy holders will still be impacted in the fullness of time. But more on this later.
APRA’s key measures and timing is directly aimed at new policy holders in the following ways:
- From 1 April 2020, ‘Agreed Value’ income protection policies are no longer available for new policy holders. These contracts locked-in an agreed sum insured, regardless of fluctuations to your income over time.
- From 1 July 2021, you will likely be unable to obtain a ‘Guaranteed Renewable’ contract for your income protection cover, rather at a set period not exceeding five years the insurer can amend the terms of your cover. Currently, Insurer’s are unable to weaken these policies to suit their profitability or sustainability.
- From 1 July 2021, insurers are expected to implement controls to reduce the risk of long-term claims. Examples include stricter disability definitions for policies with longer benefit periods (i.e. To Age 65 or Age 70 benefit periods).
What does this mean?
Agreed Value cover provided great certainty to those with fluctuating income, such as the self- employed or those who simply wanted greater peace of mind. Going forwards ‘Indemnity’ contracts will be used, which means that your income specifically at the time of illness or disablement will be the key consideration by the insurer. It is suggested that in assessing your income at claim the insurer will look at your income for the 12 months immediately before the illness or injury. This may be a value lower than your monthly insured amount (i.e. the insurer reduces your claim). Currently, depending on the insurer this period is the best 12 months over the past 2 to 3 years – which compares favourably against the proposed change.
Let’s imagine for a moment that we have a future repeat of Covid-19 or similar… all the employed and self-employed people impacted by such interruption to their income will not want to fall ill during that period or during the 12 months of exposure thereafter. For example, a policy holder who suffers a stroke or a life-time disability following a period of interruption to their income (Covid19 or similar) will see the insurer slash their claim, basing it on their lower income rather than the actual insured amount on their contract. Let’s say the policy holder was age 45, they earned only 50% of their typical earnings prior to claim – due to Covid shutdown – and were insured for $15,000pm on their contract. If the insurer reduced the claim by 50%, the impact of this equates to a financial loss of over $1,800,000 over the duration to Age 65.
Guaranteed Renewable is currently one of the key pillars providing policy holders with certainty that cover can only be improved by the insurer. This will no longer be the case, with the terms of your contract lasting a set period of no longer than five years. The owner of the policy will not need medical underwriting at the end of each period however they will be subject to the new policy terms that the insurer has at that time. It’s foreseeable that policies may be downgraded over time, leaving you with a weaker contract. Even worse is that the insurer can potentially cease your cover altogether if changes to your occupation, financial circumstances or even your age no longer fit the product design requirements.
Long-Term Benefit Periods will have more hoops to jump through to remain on claim. This is also likely to resulting in more people being forced to return to work, even if they remain somewhat impaired. Essentially, fewer long-term claims will be paid.
Where to from here?
If you currently hold an income protection policy with all of these features, you are fortunate to hold cover that APRA believes are ‘excessively generous’. These policies may therefore be more valuable to you than they have ever been before.
Existing policy holders will also be allowed to increase an existing policy, lifting the sum insured, while retaining these same generous features. This too is a fortuitous outcome.
The pessimist will ask… ‘will insurers increase premiums on these historical policies to such an extent that they become prohibitively unaffordable?’ Only time will tell…
While new policy holders don’t have the same options as existing policy holders, there are still some potential opportunities before the final changes flow through.
Guaranteed Renewable contracts are still available until APRA’s July 2021 changes. Indemnity definitions also remain stronger at present with pre-disability earnings looking back for the best 12 months of income over the prior 2 or 3 years. This is much more comforting than the proposed 1 year earning look back (the Covid-19 Trap). Lastly, long-term income protection contracts are currently without the more restrictive changes being considered by APRA.
While all future changes remain subject to industry consultation, we believe most will be implemented in some form, so be vigilant.
If you are concerned as an existing policy holder or you have been considering placing new coverage, it would be worthwhile consulting with your Insurance Adviser, sooner rather than later. This will assist to discuss options specific to you, while giving regard to your existing cover, financial circumstances and your future needs. Safeguard Life are available to address any concerns that you may have, simply ask your contact at 360 Partners for our details.
Director – Safeguard Life
Mobile 0400 440 128
Any advice in this publication is of a general nature only and has not been tailored to your personal circumstances. Please seek personal advice prior to acting on this information. Before making a decision to acquire a financial product, you should obtain and read the Product Disclosure Statement (PDS) relating to that product. Opinions constitute our judgement at the time of issue and are subject to change. Neither, the Licensee, nor their employees or directors give any warranty of accuracy, nor accept any responsibility for errors or omissions in this document. Safeguard Life Pty. Ltd. are Authorised Representatives of Bombora Advice Pty Ltd ABN 40 156 250 565, an Australian Financial Services Licensee 439065.