The start of 2022 looks set to see insurance premiums keep rising as they have in previous years. Measures that began in March 2020 to stem losses have started to take effect but premiums are still increasing. I've been writing about this for years now, if you want to see the progression that got us here please check out the insights page and keep an eye out for Hyperlinks.

We are still in the midst of significant change with October 2022 being yet another, and potentially final, stage of APRAs intervention. If you didn’t catch the detail, insurers lost approx. 3.4 billion on Income protection in the 5 years prior to 2020, this was due to a combination of low interest rates, less advisers providing insurance advice and higher costs driven by claims and legislative compliance.

To address this, the regulator stepped in with the following broad guidelines for insurers:

• Insurers must ensure IP benefits do not exceed the policyholder’s income at the time of claim, and cease the sale of Agreed Value policies;

• Insurers must avoid offering IP policies with fixed terms and conditions of more than five years; and

• Insurers must ensure effective controls are in place to manage the risks associated with longer benefit periods.

Insurance is something that astute individuals recognise they are unlikely to claim on but are not yet in a position to self insure (you have enough invested to maintain your desired standard of living) so they have an insurer cover this risk for them. So unless you do actually make a claim it’s likely to be wasted money if you don’t count the intangible peace of mind it often gives us. For younger people just getting started in their careers the previous understanding that an insurer would be able to cost effectively cover you throughout your entire career appears to now be false. So for those of us who are considering getting cover or have it and are getting whacked with premiums increases next year, what are your options and how to you make the pieces fit your unique needs?

Background and disclosures

The vast majority of our clients are young Doctors that are generally in good health but usually have put themselves through a few investigations etc in the past (often out of curiosity) which makes the underwriting process tricky. Though we have been working in financial planning for many years we have spend the last half decade learning our client needs very well and refining our process and offering to suit our chosen clients exactly.

We spend a lot of time working with insurers, industry groups and even politicians to advocate for our clients. We strongly believe in fee for service as we want to ensure that we are only ever paid by the clients we advocate for and not product providers that simply produce the products that we use. This is not to say that we are at crossed purposes with insurers. They want to provide their clients with cover that protects them at a time they need it for a reasonable cost with a reasonable profit and so do we. If we acted against that common interest we would not be serving our clients. Although we do demonstrate the differences we prefer not to accept commissions or any other payments from any source. I think an insurer did give us a box of cherries for xmas last year though.

We offer holistic planning and seek out opportunities to reduce cost relentlessly. Insurance is often a key part of the planning process but we also consider investment goals over the medium and short term as part of this strategy. Most people have a finite surplus income so reducing insurance cover means more money to pay off non deductible debt and build an investment portfolio. Our goal is always to identify and solve problems. Insurance products, investment managers and superannuation funds are all simply the tools we use to solve problems. As these tools change we have to change the way we use them.

But what do I do about my premium doubling this year?!?!?!

Your adviser needs to match your insurance products with your needs. Prior to Sep 30th last year, Income Protection products were all very similar and other than a few minor differences you could probably not go too wrong just comparing based on price. Post October 1st you can no longer buy cover as generous as you previously could and insurers have taken a very diverse approach to APRAs guidelines to make these products sustainable. How these new products interplay with one another is still largely untested at this early stage.

Your adviser should help you work through these options and how they are relevant to you specifically but generally speaking here are a few options that reduce premiums:

• Waiting period

  Can you survive for 2 or even 3 months on your savings and sick/ long service leave? changing from a 30 to 90 day waiting period often reduces premium by approx. 30%.

• Benefit period

  Are you getting toward self insured? Reducing from an age 65 benefit reduces premiums significantly and this is the primary focus of recent premiums rises. This is something that should be used with caution as while reducing waiting period as above might have you lose a month or 2 benefit, reducing your waiting period could have you losing out on decades on benefit. Hence the focus of the premium rises.

• Bells and whistles

  Do you have day 1 accident cover or other premium features? Much like the waiting period above these might provide immediate benefits that were important when you started the policy and were living pay check to pay check but not now you have a good buffer account and can self insurer over the short term.

• Move from a Level to stepped premium

  This is a tough one as when you paid a level premium you essentially averaged your premium until age 65 etc. Stepped premiums increase as your age does while level does not. Both types are still subject to other factors that increase premiums and we are seeing the results of this now. If you have been paying a higher amount for years are you still below the stepped premium which will increase at a faster rate? or did you just start 2 years ago and have already had a doubled premium? Stepped in mid 30s is often half the premium of a level structure. Once you switch to stepped from level the benefit of that additional payment evaporates.

• Remove/rebate commissions

  This is uncommon for most advisers but something we do every other day at NOR. Most insurance policies come with an ongoing payment to your adviser of 10-30%. Some insurers allow you to remove or rebate this which decreased your premium accordingly. Of course you would need to then pay your adviser for service when you need/want it so you need to weigh this up. This varies by insurers and product type and depends on how it was set up. We favour this as we can reduce cost with no loss of benefit and one of the few “magic wands” we have at our disposal when we are trying to manage high premiums.

Lets make no mistake, clients don’t want to pay high premiums yet insurers have to make sure they have enough to pay claims. This means less investment in this space and blown out timeframes across the industry simple alterations can take months where previously we would see this take days. Clients and their advisers as well as insurers are feeling this pain right now and we are seeing lay offs and budgets tightening across all stakeholders. APRA had to intervene or risk collapse of an entire industry. This would mean bad outcomes for many who have invested in cover for years and may have health concerns that while not yet claimable may be in future and would lose cover completely. Insurers that don’t meet these new guidelines are fined significantly though some have chosen to be quite liberal in their interpretation. This could be considered as an attempt to increase market share but we expect a push and pull as IP products homogenise over the next few years. So, even though its hard to swallow, all we know is that if you have cover in place its more generous than anything available to replace it with, so what is that difference worth to you?

As a specialised adviser in this field I have always asked clients to reflect on what they really NEED. We aren’t looking to cover them for as much as is humanly possible, just enough to reasonably meet their needs in as many scenarios as possible. This varies by every person and changes over time. As advisers we are just here to help you hope for the best and plan for the worst, as the world at large and your situation changes we adjust our strategy to suit. The only thing we can ever be sure of is that we will do our best to work in your best interest.

The lead up to 30th September 2021 became a little manic for risk specialists such as myself. We had five times more client enquiries than any other month and had to push very hard to fulfil these requests, while still providing high quality advice. A key issue was that advisers were unsure what would happen with the release of new insurance products in October. The whispers we had suggested these products would be far inferior to those we had become comfortable with. So are the new type of contracts really that different?

There are a few major differences however how these will really work still remains to be seen. The big concern was that long term Income Protection claims would only be payable on an “Any Occupation” basis and age 65 benefit periods would be removed. It turns out that this is not actually the case for all insurers, some have come up with unique ways to manage stability that does not follow the previously published APRA guideline exactly. The final phase of APRA mandated changes come about in Oct 2022, when it’s planned that ‘Guaranteed renewable contracts’ will no longer be offered. From this point on, income and occupation can be assessed every 5 years and contract terms amended. Potentially to your detriment although you wont need to be medically assessed again. In the meantime contracts are being tweaked and modified as each insurer gets a look their competitors interpretation of APRA’s guidelines. Ultimately, nobody is printing their PDS right now, as they are being adapted and modified daily.

The big changes

• Age 65 benefit periods:

  All insurers have actually retained long term benefit periods such as “age 65” in at least one of their offerings. They are of course, adding details that may make this a hollow promise. These details need to be very carefully considered.

• Own occupation cover:
  This is the key way to manage long term claims. Initially, you would be assessed on your ability to do key duties of your job and also hours to match. After some time eg 2-5 years, many providers are opting to move to a “Suited occupation” definition. Though the term is slightly different this is essentially the “Any occupation” wording of the past. therefore the insurer would be able to assess if you were physically and mentally able to perform a job that you were reasonably suited for by education, training or experience. Does this mean that a neurosurgeon is suited to pushing a broom around a warehouse? Untested ground so far.

• Sick/ long service leave and other sources of income:

  Previously you (or your employer) could choose to use long service leave or sick leave during or before your claim commenced. Now, many insurers are saying you must take this first, before a claim can begin. Any income from investments or your business, is also considered and may reduce your payment, where previously this was often irrelevant.

• How much is covered?
  Previously your “pre disability income” was simply 75% of your indemnity amount across all insurers (some threw in an extra 10% for super). Now there is a vast difference, with some offers covering up to 90% for first 6 months and then potentially dropping down to 50% on longer term claims. How this is structured is usually an optional extra.

• Capability clause

  Every insurer bar one (PPS Mutual) has now applied a ‘capability clause’ of some sort. This clause means that if the insurer deems you medically able to return to work and be “off claim” they have the discretion to stop paying you. This is based on the opinion of your treating medical provider. Essentially this is designed to stop claimants intentionally lowering their income or hours to still meet claim requirements.

• Recovery, re-education and retraining

  Income protection was never designed to be a set and forget system, as you would need to show that you were attempting to recover and your treating doctor is required to sign off on your inability to work. There has been significant expansion of this wording, where insurers are looking to rehabilitate and get claimants back to work. While this certainly goes a long way to reduce costs to insurers and consequently reduce premiums. The mantra that “work is good for you” has become significantly more prevalent and insurers are working on programs such as ‘Best Doctors’, to get people back to work.

• Level premium structures

  With changing product types and sustainability in question, there was a lot of speculation regarding level premium structures still being offered. It does appear that a few insurers have opted for Stepped premium structures only, while others are offering both. As mentioned before we have not yet reached the October 2022 cut off. This among many other factors, may still change.

Risk advisers are now specialists

Income Protection options have never been so diverse. Up until now an adviser or broker had simply to compare a research rating usually produced by one of two providers (IRESS or Omnium) and then find the cheapest premium. Every now and then there might be a few features that were relevant to the client’s unique needs. However, ultimately this simple process was all that was required to demonstrate the advisor was working in their client’s best interest. Now there is a wide spectrum of options available to the client and the emphasis is on the adviser research the clients requirements fully and find a policy to suit those needs. This demands an excellent understanding of all risk products and how they work in conjunction with one another. Scoping advice just down to “how much insurance would you like” is increasingly risky as the adviser is bound to fulfil this duty.

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The Sky didn’t fall, you can still get good cover at a reasonable price

All factors considered, I do feel like the “sky is falling” mentality insurers happily played into during the lead up to October 1st, was largely unfounded. One could almost think that there was an element of marketing involved here.

Advisers, especially risk advisers, hate unknowns. These changes were touted as the most significant changes to insurance in Australia in the last 30 years. We were warned of far weaker Income Protection contracts, at higher prices. The industry at large became incredibly nervous and clients caught on to this.

At first glance it looks like some insurers have used a combination the ‘capability clause’ or a reduction of income test, to ensure that long term claims such as age 65 are still available. However there is more wiggle room for the insurer to reduce this over time and therefore manage the cost. It is also likely in the coming months that others with amend their offerings to reflect this unique interpretation and remain competitive.

Only time will tell if this all settles down. For now we still have little certainly. Premiums could potentially keep jumping and contracts may be further modified. Nevertheless the world continues to spin. Claims continue to be paid to people who need it. No matter what happens your adviser, if you have a good one, will be standing by your side through it all.

Insurance affordability has been a key concern in the last year or so. For many clients we planned ahead for this years ago by selecting Level premium structures but were the assumptions we based this strategy on flawed?

With the significant changes in Income Protection insurance coming at the end of September we are having a very close look at how to move forward with both new and existing customers. Unfortunately, we have very little visibility on where this road leads as insurers have been playing their cards very close to their chest. While we have indicators of what these new products might look like, we simply cant see past September 30 so its difficult to plan past this point with certainty, which is a key role of a risk advisor.

How do you work out a Level Premium?

Level Premiums are based on your age when your insurance policy began. Essentially, your premium is averaged out (typically until age 65) so you pay more now and less later, when you are more likely to claim. Stepped premiums are the standard option and increase with your age and likelihood to claim so while it might be cheap to start with you will eventually get priced out, so if you are young, why not pay a little extra to have cost effective cover when you need it? Sounds good in theory but predicting the future can be tough and while insurers still need to make a profit they also need to be competitive in a harsh marketplace.

There are a lot of assumptions used to price this over 30 or even 40 years. I am certainly no actuary but a few factors that appear to have severely been underestimated are:

• Interest rates - The neutral rate is around 6%. It’s been far under that for years now and likely to be for some time. Insurance pools must be held in low risk assets which are seeing neutral or even negative returns.

• Rates of claims - Generous terms, more proactive medical systems and more educated and aware clients mean that new claim rates have been increasing. Plus, people on long term claim tend to stay on claim and receive monthly payments for decades.

• Reduced new business - Legislative red tape strangling advisers and insurers who design and distribute insurance products have drastically reduced the number of new (and healthy) lives that are joining insurance pools.

I am sure that there are numerous other factors at play here and as an adviser I am not privy to what goes on in Life and Reinsurance offices. I do however see recent pricing increases and note that Level premiums are going up around 20% faster than Stepped premium structures and with the focus on Level premiums and have to seriously wonder if this will ever stop. If you are interested in the most recent increase please follow this link to a Zurich update. Zurich are a very well established and historically stable insurance provider in Australia and these premium increases have been lower than many this year but this is not the first time they have applied this in the last 3 years.

The new reality

Even up to 18 months ago, it was a widely accepted rule of thumb that if it was likely you might need insurance cover for over 12 years, a level premium structure was more cost effective as the cross over for when stepped overtook Level was around 12-14 years away. I ran this calculation on a Doctor in his mid 30s last week and it appear this cross over point is now 22 years away. This calculation does not include any future increases such as described above so its quite possible that paying a level premium has no benefit at all. Quite simply, this throws the shop worn knowledge about level premiums out the window.

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What is the outlook?

You can always switch between Stepped and Level premiums at any time. It appears that this option will continue past October 1 but there is still uncertainty there. Its very likely that Level premiums will not be available on new Income protection contracts past this point but existing contracts should be “grandfathered”.

Of course, if you have been paying higher premiums for some time to try and manage future cost this can be tough to walk away from. If this trend does continue its likely that level premiums will quite simply become unaffordable, exactly the same as stepped later in life, its just a matter of when.

If you have held a level premium for a long term, even with these recent increases, switching to stepped may still might increase your premium. You will need a good adviser to assess this for you as each policy and person is different.

As I have said before there is certainly no one size fits all strategy here but it does appear that relying on a cost effective protection strategy based solely on insurance is a thing of the past. Moving to self insurance is down to your unique needs and may take some time to properly establish so while good cover is often essential in the short term, so is reducing debt and building up income producing assets for the longer term.