On 2 December 2019, the Australian Prudential Regulation Authority (APRA), the regulator for life insurers in Australia, launched an intervention into the insurance market in response to substantial ongoing losses on income protection insurance. APRA proposed a series of measures requiring insurers to address policy design and pricing to improve the sustainability of the income protection market.
If implemented, these will be some of the most significant changes to the personal insurance industry to date. The changes should not impact current income protection policyholders but will be relevant for new policies, or increased levels of cover.
APRA has put forward several initiatives for the industry to consider, referring to “excessively generous features and terms that, in some cases, provide a financial disincentive for policyholders to return to work”. APRA expects insurers will cease to offer certain product features in the future to address this.
The proposed changes
From 31 March 2020, Agreed Value income protection policies will no longer be available for new policies. Agreed Value refers to the locking in of the monthly insurance benefit (similar to car insurance agreed value), without needing to prove what you were earning at the time of claiming. This is particularly relevant for self-employed persons where annual income may fluctuate, and Agreed Value policies would offer greater security.
By July 2021, insurers are expected to no longer offer some other benefits, with the two biggest changes being:
- Policies will no longer be “guaranteed renewable”. As a result, every five years the insurer can revise the terms and conditions of a policy and re-assess the insured’s income and occupation position. This compares to current policies, which lock the insurer into the terms and conditions from policy commencement and these terms and conditions cannot be made worse, only improved for the benefit of the insured. This means that:
- If you changed occupation to something ‘riskier’ or were earning less (or perhaps not working at all at the time) and the policy was reviewed at this five-year interval, you could find the cost of the cover increasing or the insurer no longer offering you the same level of cover
- Of particular concern, at the five-year interval, the insurer may also decide to change the terms and conditions you need to satisfy make a claim, making it much harder to claim successfully.
- Policies with long term benefit periods (typically “to age 65”) should have controls in place to limit the ongoing claim, such as having a stricter disability definition for longer benefit periods. This means that:
- Currently, there is one ‘tier’ of definitions you must meet to claim on an income protection policy and remain on claim if you are unable to perform your normal job. The changes mean new policies will have an additional ‘tier’ to meet to remain on claim for a longer time frame. This means people could be forced into finding work before they are ready, if they do not meet the prescribed disability criteria.
The changes will go through a consultation process between APRA and the industry so there could be variations of these measures, which are unlikely to be finalised until much later in the year. At present, we know of the Agreed Value changes beginning 31 March 2020, but we expect insurers will begin implementing changes for new policies over the coming year, particularly as they stand to benefit from lower claim payments from new policies. As a result, we strongly support getting appropriate cover in place sooner rather than later.
If you don’t already have income protection cover in place, here are some other important considerations:
- Your greatest asset in life isn’t your house or superannuation, it is your ability to earn an income. Over a working lifetime of 40 years the average Australian earns around $3 million. You insure your home, why not your income?
- Income protection cover is tax-deductible, effectively discounting your premiums by 19%-47% depending on your level of income
- Income protection policies can offer other benefits, for example, upfront payments if you are hospitalised for a few days, upfront payments if you break certain bones or upfront payments if you are diagnosed with a major disease or cancer
- Income protection cover offered by your super fund may be of low quality and not priced very competitively compared to more comprehensive policies outside of super
- You are more likely to claim on income protection cover than most other types of insurance, such as your car, home or even life insurance.
If you have not organised income protection cover for yourself already, now is a great time to do it, before these changes are introduced. If you do have some cover, but you haven’t reviewed it in a while, or perhaps you only have cover held in your super fund, speak to a BDO Private Wealth Adviser to review the best cover for you.