APRA measures to improve sustainability and profitability of retail IP

Individual Disability Income Insurance (IDII) has struggled to be profitable and sustainable, which has led to the driving up of premiums and impacted affordability. This has led to APRA stepping in to protect the ability of the industry to meet its obligations to its customers.

Over the 5 years to September 2019, APRA reported that the Australian IDII industry lost $3 billion, including $1 billion over the 9 months to September 2019. APRA Quarterly Life Insurance Performance Statistics for June 2020 (released 27 August 2020), shows that for the 12 months to June 2020 retail income protection (IDII) lost more than $1.2 billion. 

With this concerning trend, APRA has actively encouraged the life insurance industry to address the issue and develop possible solutions to assist with sustainability. This included APRA proposing ten measures in December 2019 in relation to IDII that are intended to minimise customers withdrawing from the market and ensure the retail insurance market remains viable for current and future generations.

At MetLife Australia we support APRA’s efforts to establish an insurance market that serves customers over the long term.  We acknowledge APRA’s concerns that certain practices have led to unprofitable and unsustainable IDII products. An example of which includes product features that place the claimant in a better financial position than what would otherwise have been the case prior to the event. Product design features like these, may encourage claimants to remain on the claim longer than is necessary through the course of rehabilitation due to the associated financial incentive. MetLife agrees with APRA that industry intervention is required in these circumstances to ensure IDII continues to serve its purpose to provide financial security for customers, and to necessitate appropriate and affordable income protection cover within the industry.

APRA has set expectations across five areas that include the following specific aspects aimed at improving IDII:

Effective from  1 April 2020

1. Insurance companies will be expected to stop issuing any new agreed value or endorsed agreed value policies.

Proposed measures from 1 January 2021

2. Premium pricing must factor in industry experience studies that are no less than 18 months old.

Proposed measures from 1 July 2021

3. Benefits will be based upon the life insured’s income over the preceding 12 months. 

4. Insurance benefits, and other earned income, will not exceed 100 per cent of the life insured’s income for the first six months of benefit payments. 

5. Insurance benefits, and other earned income, will not exceed 75 per cent of the life insured’s income for benefit payments that are longer than six months. 

6. Maximum benefit payment of $30,000 per month.

7. Policy term of the contract shall not exceed five years. 

8. After the initial five years, the policy may be renewed without medical underwriting, but both income and occupation will need to be reviewed and confirmed. 

9. After the initial five years, the terms and conditions issued on the new policy must be based on the policy on issue at the time of renewal.

10.Have effective controls in place to manage the risks associated with long benefit periods (e.g. having a stricter disability definition for long benefit periods).

Client Impact

Clients who purchase retail income protection policies from 1 July 2021 should expect fewer features, options and benefits than have previously been available. The intention of the proposed measures is to ensure that IDII product design is consistent with the insurance principles and that risks are being appropriately managed. 

The proposed APRA measures still raise a few questions in relation to operation and implementation of new income protection products from 1 July 2021:  

• Will the current practice of “pay and close”, where a client is paid in advance based upon the estimated duration of disability, cease due to the client returning to work too soon and thus being paid in excess of 100 per cent of their pre-disability income?  
• Will trauma cover and specific injuries cover cease, as it may pay a total benefit in excess of 100 per cent where the life insured continues to work?  
• May a client continue a policy at the end of the five-year term, where they are not currently in gainful employment (between jobs or currently unemployed)?  
• How will pre-disability income be calculated if the life insured is absent from the workforce due to parental leave or sabbatical?  
• Will individuals on long term claim have reduced income replacement ratios (60%, 50%, 40%)?
• Will individuals on long term claim have more stringent disability definition (“any occupation” versus current “own occupation”)? 
• Are there minimum benefits that must be offered when the policy renews every five years? 

Adviser Impact

Clients may hold existing income protection policies that have benefits, features and options, such as agreed value, trauma cover, specified injuries, and automatic indexation, that may not be available for new policies from 1 July 2021.    

Advisers will need to consider the benefits available and the premiums to be paid, and help clients understand their options. Is it better for the client to continue to hold an income protection policy with existing benefits and features, but pay higher premiums that will likely continue to increase over time? Or does an income protection policy available from 1 July 2021, which is likely to be more affordable but with fewer features, suit their needs better? When is the right time to change policies based upon the health of the life insured and potential loadings and exclusions?    

Advisers can play a key role in helping their clients navigate this territory and find solutions that meet their individual needs. 

ASIC Report 413 states that an adviser has a responsibility to recommend products that are both appropriate and affordable. The intension is that clients can continue to pay the premium both now and in the future, especially as the risk of claim increases as they grow older. No adviser wants a client to lapse their policy due to a lack of affordability of premiums and subsequently suffer a disability.

Summary

The individual disability income insurance measures proposed by APRA should create new policies from 1 July 2021 that will provide affordable income protection policies to clients while ensuring the long-term sustainability of the industry. This approach should also lead to better retention of income protection policies over the long term, allowing clients to protect their most important asset – the ability to generate an income – right through to retirement.     

Author

Dr Jeffrey Scott, Head of Advice Strategy, MetLife Australia

For more information on MetLife Australia, visit https://www.metlife.com.au/partnerships/advisers/.