Addressing the AIOFP conference in Hobart on Wednesday, Metlife head of advice strategy Jeffrey Scott said the changes – due to come into force in October – would see benefits reduced rapidly for long-term income protection claimants and additional payments made to encourage those on claim to retrain for new roles.
“APRA has said that in the six months after [clients] become disabled, we will let insurers replace up to 90 per cent of their income. After six months, that goes to 70 per cent,” Mr Scott said.
“Why did they do it this way? They want people to get retrained and rehabilitated and go back to work. By reducing the replacement ratio it will hopefully encourage people to return to work. That was the intention behind it.”
More generous short-term benefits would also be combined with super contributions and rehabilitation and retraining expenses on top of the replaced income under the new income protection rules, Mr Scott said.
“In addition to the new 90 per cent replacement ratio, [policies] will also pay contributions through to super,” he said.
“The other thing they’ve done is said in addition to your 90 per cent and your super we’ll pay for your rehabilitation, so it’s all about getting back to work and rehabilitation and retraining both work for that as well.”
The new restrictions would also ensure policies did not apply for more than five years at a time, meaning insurers would need to regularly re-assess clients’ occupations, income and lifestyle and any relevant risks.
“After five years the policy has to be re underwritten. We don’t have to underwrite for health but we’ll have to underwrite for the income you’re currently earning, occupation you currently have and any additional pastimes that you might be doing on the side,” Mr Scott said.
“If you go from being a brain surgeon to a garbo and have appropriate income that goes with it, that will change your premiums. If you go from a brain surgeon to an abalone fisherman, abalone fisherman can’t get coverage, so what happens to your client’s policy, it stops.
“The other thing is the policy that gets renewed at the end of five years isn’t your existing policy. If you had a policy with bells and whistles and you took it out in October 2021, by 2026 if they’ve taken away the bells and whistles and it’s a bare bones policy, that’s the only thing you can be renewed to.”
Mr Scott said the changes had come about due to insurers losing $3.7 billion in income protection products in the three years to the end of 2020, largely as a result of overly generous benefits and unsustainable levels of claims being paid out.
“Over the past 12 months the losses on retail income protection were over a billion dollars. In the 12 months before that it was $1.9 billion, and in the three years to 2020, $3.7 billion,” he said.
“APRA has said ‘please explain’ and ‘we’re going to step in because [CEOs] have been lacklustre and are ignoring what’s actually happening’.”
Annoys me that mental health claims are costing the industry so much and as a result look like reducing long-term cover for all types of injuries and illnesses now. Why hasn’t the industry brought in physical and mental stress testing so it can apply a user pays premiums system. Fat people that eat donuts and don’t exercise should pay more than skinny people who workout daily. Likewise, someone with mental resilience should pay less than someone with limited fortitude. Healthy people will end up self-insuring and the remaining few who want cover will pay a fortune, much like the private health industry. Flawed model trying to pool risk. Need more personalised assessments and premiums.
Unlike obesity and other physiological conditions, mental health conditions likely to lead to a claim cannot be easily identified and loaded/excluded in advance, and at claim time they can be easily faked.
Many mental health claims are actually related to job loss, career stagnation, or business decline. They are driven by economic issues, not health issues.
The solution is to remove mental health from IP policies altogether. Many direct products have done this already.
Just close the product APRA – that should get your KPI of reducing premiums – job done?
Who will sell these policies? Damned if I will be involved in getting clients into these useless policies. Apra dont you see the pool will shrink even further, its supply and demand 101.This market is going the way of the dodo big time.
So et me get this straight… more work for the advier every five years with underwriting… potentially reduced coverage based upon the flavour of the day… will there at least be any premium relief to accommodate for these inferior offerings? Or is that how the insurance companies are recuperating their loses?
I hope some of these people in APRA either become homeless or have a family member become homeless due to the short sighted changes they are making for long term IP claimaints. Nothing like sticking the boot in when someone needs a hand up, just what you expect from government and their hangers on.