Disability income insurance provides crucial protection for Australians against the risk that illness or injury may stop them from working. It has been a safety net against serious conditions such as cancer, musculoskeletal issues, and mental illness.
However, the financial health of life insurers has not been as robust. Last December, the prudential regulator wrote to all life insurers outlining new sustainability measures after the industry lost a collective $3 billion on individual disability income insurance policies over the last five years.
“Australia’s $5 billion disability income insurance sector must undergo long-term reform to protect customer and broader community interests,” says the Actuaries Institute. “Product design, rating, advice, risk management, governance and regulation must be reviewed.”
APRA’s regulatory intervention is already ushering in a new era for life insurers, who will now stop offering agreed and guaranteed value disability policies. These policies were previously meant to pay a set income regardless of actual earnings at the time of the claim.
Further changes to disability insurance are likely to follow that will bring Australian practices in line with countries such as the UK, US and South Africa – but is it in the interests of policy holders?
Insurance continues to play a vital role in troubled times
While the price of disability income insurance policies has increased and terms have been made more stringent in recent times, those changes aim to ensure that the sector is viable and able to continue paying claims.
A sustainable insurance sector is ultimately also in the interests of policyholders. But while coverage is changing, insurance remains more crucial than ever.
For example, the coronavirus pandemic that spread across the world this year took many people by surprise.
The most common causes of individual disability income insurance claim payments are musculoskeletal issues (15%), cancer (14%) and mental health issues (13%), according to the Financial Services Council.
Disability income insurance provides crucial protection against these common problems, given no one knows what lies ahead. Future changes to policies are also likely to encourage people to return to work.
Removing disincentives to return to work
The replacement income rate offered by many Australian disability income policies has been among the highest in the world. Replacement income rates of 75% of earnings are common compared to 50-65% in the US or 60-65% in the UK, according to the Actuaries Institute/KPMG report.
“In some circumstances, where an Australian policyholder has an income replacement ratio of 75%, the policy may typically permit more than 102% of pre-disability take-home pay,” Daniel Longden, KPMG Actuarial and Financial Risk Partner, said when unveiling the report earlier this year. “A high replacement ratio can be a disincentive to returning to work.”
While scaling rates back to more moderate levels sounds like an unappealing prospect, relying on government assistance is unlikely to be preferable. A worker who earned the average weekly full-time wage who is paid 60% of their income under an income replacement policy is likely to receive more than twice as much as the government’s Disability Support Pension.
There are also currently regulatory limits on insurers offering early rehabilitation services to policyholders, particularly when the policy is written through a member’s superannuation fund. It has obvious individual and societal benefits but it could also create a conflict of interest because life insurers would be paying claims while also trying to encourage the policyholder to return to work.
The situation is different in the UK where 2017 data shows 3,000 employees were provided with services such as counselling or physiotherapy that enabled them to return to work without having to claim for income replacement.
“More than half of these employees were provided with help to deal with a mental health illness and 17% were provided with support to help with musculoskeletal conditions, according to the Actuaries Institute and KPMG. “Of 5,255 who made claims in 2016, almost 2,000 people were helped by the insurer to make a full return to work in 2016 or 2017.”
Australian insurance and fund manager representative group, the Financial Services Council, has lobbied government to allow insurers to take a more active role in helping Australians return to work.
While insurers have been required to make recent changes to their disability income insurance policies, we believe they continue to offer good value and protect Australians when they most need it.
If you have concerns about your life insurance policy, speak to us today on P: 08 8268 5160.
https://www.apra.gov.au/sustainability-measures-for-individual-disability-income-insurance
https://home.kpmg/au/en/home/media/press-releases/2020/02/disability-insurance-sector-reform-needed-says-actuaries-institute-and-kpmg-10-february-2020.html
https://www.servicesaustralia.gov.au/individuals/services/centrelink/disability-support-pension/how-much-you-can-get/payment-rates
