March 2020 - The end of great Income Protection Policies?
If you have read a few of my blogs you may recall me mentioning the strife going on behind the scenes with insurance. Disability Income Insurance (commonly called Income Protection) in Australia recorded a 1 Billion dollar loss in the first 9 months of 2019 which pushes total losses over the last 5 years to 3.4 Billion.
APRA stepping in to limit losses and provide sustainability.
On Monday the Australian Prudential Regulation Authority (APRA) stepped up and have proposed the following changes:
ensuring DII benefits do not exceed the policyholder’s income at the time of claim, and ceasing the sale of Agreed Value policies;
avoiding offering DII policies with fixed terms and conditions of more than five years; and
ensuring effective controls are in place to manage the risks associated with longer benefit periods.
So what does this all mean?
Regulators, insurers and of course advisers are still wading through the details as this is still just a proposal with a consultation process. Early expectations are that this simply had to happen.
Agreed Value Income Protection
If you have a good quality income protection policy in place you likely provided financial information at time of application. The insurer would then “endorse” your insured value so when or if you make a claim there is no financial information required, just a medical professional signing off that you can not work and the claim is made.
If you have an “indemnity” contract a claim would be limited to 75% of your income in a 12 month period, or your insured value, whichever is higher. Sounds simple but if you are newly self employed, say you opened your own practice and are still building patient numbers, or if you have been on maternity or unpaid leave this could be 75% of far less than you should actually be earning or what you are really “worth”. This is especially prevalent in the case of small business where books seem to fall on the wayside and tax returns and financial can be 2-3 years behind. Laying in a hospital bed trying to arrange your last 2 years tax returns to be completed is not an ideal scenario.
Guaranteed Renewable contracts
Any good insurance policy will offer a guaranteed renewable contract. This means that the insurer may not change the contract to your detriment as long as you continue paying the premium. Some even offer “auto upgrades” to new definitions etc. So how does this work? Well if you were a hospital based administrator (low risk rating) when you applied for your policy and then a few years later decide to go join Médecins Sans Frontières and work on a vessel off the coast of West Africa you would still be covered. Under the new rules you would need to alter or renegotiate your contract at least every 5 years and subsequently change your “rating” accordingly and, in this example, likely would not be insurable at all.
“Age 65” benefit periods?
This is a little vague at this point but while it looks like age 65 or 70 benefits may still be offered there now needs to be “effective control” to manage the risk involved with what could be an insurer bound to paying a monthly benefit for over 30 years. A likely outcome is that “own occupation” IP may only be offered for a short term such as 5 years with this reverting to more general definitions over the longer term. Effectively this means that if you were on long term claim you would need to be unable to engage in paid employment of any sort to continue claim. TPD cover will likely still be on offer under own occupation so this is a natural pairing to help cover this uncertainty.
What can you do?
While this is still early days if these changes do happen it is very likely that any contract “in force” before March 31st will stand. If you have been considering maybe reviewing or establishing good cover, do it now not later as this does take time to apply for and establish.
If you were unaware, we service insurance clients across Australia virtually and have access to a network of other professionals like us across Australia if you want a face to face meeting. We don’t like to be blunt but this is quite simply the biggest change to Income Protection or Insurance as a whole in Australia in living memory and is not to be taken lightly.
As always this is not to be considered personal advice and this information is general in nature only.