Last month, the Council of Australian Life Insurers (CALI) revealed that mental health is now the leading cause of total and permanent disability (TPD) claims, making up almost one in three claims paid.
Alongside insurers paying out more than $2.2 billion in retail mental health claims in 2024 – almost double the amount paid just five years ago – the latest CALI and KPMG Cause of Claims Results report found mental ill health is also driving one in five income protection claims, with payouts totalling $887 million last year alone.
CALI chief executive Christine Cupitt said Australia is “reaching a tipping point”.
“The entire safety net, not just life insurance, is under pressure,” Cupitt said.
According to Hayes & Co Insurance Services financial adviser Trish Gregory, the solution to the massive growth in mental health TPD claims needs to find a middle ground between wide-ranging mental health exclusions and an unsustainable level of TPD payouts.
“The great thing is that mental health is being talked about more. The problem is that the world seems to be getting more challenging, not less stressful. The biggest issue is not so much the income protection, it’s actually the total and permanent disability insurance,” Gregory told ifa.
“It tends to be the big issue, because the purpose of total and permanent disability insurance was you’re never working again in any job for which you have education, training and experience.
“When you think about it, if you’re never working again, you want a lump sum of money to pay off your home, to pay for medical expenses, because Medicare and private health do not cover everything when you’re totally and permanently disabled.”
Where it can become complicated, she explained, is that a “whole bunch” of clients that receive a mental health TPD payout will be able to go back to work at some point in the future.
“They’ve had a significant amount of time to retrain, to get their life in order, to just fully restart everything,” Gregory said.
“I think that the big issue with TPD is although these are legitimate claims, and of course they should be paid out, I don’t think the insurers had quite anticipated the level of mental health claims that there are now, because that wasn’t the intention when they wrote these policies forever ago.”
In many cases, she added, the response to this has been for insurers to become “quite harsh” in their use of mental health exclusions.
“If you’ve ever talked to your doctor and said, ‘Oh, I’m a bit tired, or I was sad, or I took a day off work for a mental health day’, or you’ve seen a psychologist who you’ve had medicine in the past sort of five years, you’re knocked out, you cannot claim on mental health,” Gregory said.
“Generally speaking, as a broad statement, they will put a mental health exclusion on your income protection and your total and permanent disability right from when you take out the policy.”
Looking at the situation just in terms of her own clients, Gregory detailed that around 70 per cent of policies have a mental health exclusion when they’re put in place.
“It’s definitely the majority rather than the minority.”
Importantly, she explained, insurers understand that the situation isn’t fair and they know people are doing the right thing, but they can only work with the information they have.
“If you have seen someone for a mental health issue, however mild, they’re going to exclude you. If there’s someone who hasn’t seen someone for a mental health episode, hasn’t seen a doctor, hasn’t seen GP, maybe being all stoic and hiding it deep down and getting insurance, the insurance can’t say that they don’t believe you and you’re not mentally OK,” Gregory added.
“They can only work with the information that they have. So, if someone gets the policy and then a year later, they have a mental health episode and they go on medication, that’s OK because they’re covered for mental illness, which can be the challenge.”
One way to solve the issue that could work for both clients and insurers is having a specific mental health TPD policy, she said, which would operate differently to a physical TPD claim and provide some level of lump sum and ongoing care “dripped out over a number of years”.
“If someone has the mortgage paid off and they’ve got their income protection coming in, maybe they have the space to recover and don’t actually need the ongoing care costs, because they might go back to work in two years or three years or five years,” Gregory said.
“The key thing is, how do we make sure that the insurers stay solvent so they can keep paying out claims, and they don’t have to raise the insurance rates ridiculously high?”
Ultimately, if the only solution for advisers is to jack up the rates for coverage, a whole host of clients will cancel or reduce their coverage, but it won’t be the people who are most likely to claim.
“The people who can’t cancel because they have a mental illness, but their coverage doesn’t have a mental health exclusion on it, those people are sticking to their policies and they’re more likely to claim,” she said.
“Then the pool of insured people is smaller. They’re getting less money. They need to increase rates. It’s a cycle.
“I wish it wasn’t but [premium increases] are needed for these companies to keep paying out the claims for people who need them.”
I agree with the points made in the article – thank you Trish and Keith. However, this “help we’re losing money” agenda has been started and is being controlled by the insurers via CALI. As they did with APRA’s IP reforms in 20 / 21, off they go to government and regulators saying, “please do something to stem the tide of losses so that premiums remain sustainable.” It’s no co-incidence CALI’s request to regulators seeking a ban on the use of genetic test results to assess insurance applications coincided with this. Their idea of a quid pro-quo no-doubt. As advisers we need to keep pushing government and regulators (via the FAAA) to do something about the long-term damage that will be done by “front-loaded” discounts. These are an artificial false economy that encourage policy replacement every 3 to 5 years. The historic boom / bust approach to simply closing a pool of lives when premiums are no longer competitive needs to end.
Should it really be on an insurer to payout for lifestyle financial pressure or workplace bullying? I don’t think so. If you’re struggling to keep up with the jones’, insurance wasn’t designed to be your out. If you work at a hostile workplace, insurers should be allowed to litigate against the workplace for the payment…
At the moment it’s not on the insurer. It’s on other policy holders who have been slugged with massive premium increases to pay for the mental health claims blowout. Insurers are too scared of the mental health lobby to dare even question a mental claim. They are too scared of their shareholders to take a profitability cut. Slugging other policy holders is the easy option. Until too many policy holders cancel, and the whole thing suddenly collapses.
Will no one ever address the elephant in the room when it comes to TPD claims. How is it today that insurers think they are able to pay TPD claims without satisfying the key word in any TPD definition, the descriptive word “permanent”.
Has there indeed been a significant and quantifiable increase in certification by mental health professionals that sufferers of mental health are now progressing to be able to have their illness certified as permanent?
In my discussions with mental health professionals, I have been told there has indeed been a significant increase in the number of persons diagnosed with a debilitating “temporary” mental health conditions, but that the proportion of mental health sufferers that can be deemed legally to have a permanent disability has not increased.
Yet insurers us telling us that TPD claims for mental health have increased and therefore, ipso facto, TPD premiums must be increased , and some insurers are looking to design disablement products which do not provide benefits for mental health illnesses
To paraphrase Old Willie, it seems something is wrong in the state of Life insurance. What does the Institute of Actuaries have to say about the matter.
Are TPD policyholders being set up for yet another gouge in legacy products?
As Bill states above, who is able to identify a ” temporary or permanent ” illness. am pleased I am not still propping up the insurers on renewal.
Mental health needs to be stripped out of TPD and IP, and offered as an optional extra or separate policy. It should be priced in line with mental health claims incidence, and consumers could decide for themselves whether they want to pay the large additional cost for mental health cover.
At the moment all TPD and IP policyholders are being forced to pay the large additional cost for included mental health cover, and it is making their total policy cost unaffordable.
There is a massive anomaly in the space. On the one hand, we encourage people to seek professional counselling for mental health issues, but then apply exclusions on their policies if they happen to mention that they’d sought that help.
It’s surely time for a reassessment of how we underwrite for this issue.
Agree