In December 2019, APRA proposed a number of sustainability measures in response to the large industry losses caused by Individual Disability Income Insurance (IDII) over the past five years. Many of the measures are intended to reduce the possibility claimants could receive more by way of insurance benefits than their pre-disability income.
This article will examine each of the measures, the proposed commencement dates, and the potential unintended consequences on new and/or existing clients.
It should be noted that under the measures, clients who purchased IDII prior to 1 April 2020 will be able to retain their existing benefits and features (i.e. grandfathered).
Measures from 1 April 2020
1. Insurance companies are expected to cease offering any new Agreed Value or Endorsed Agreed Value policies. Indemnity style IDII products will only be permissible.
Measures proposed from 1 January 2021
2. Premium pricing must be based upon industry experience studies that are no more than 18 months old.
• Pricing will be based on more up to date data which means premiums will better reflect recent claims experience. Based on that recent experience, this may result in premium increases. It may also provide insights into the effect of APRAs proposed measures.
Measures proposed from 1 July 2021
3. Benefits will be based on the life insured’s annual earnings over the preceding 12 months at time of claim. While APRA have sought feedback from industry on this proposed measure, it may result in unintended outcomes for some vulnerable individuals.
• Vulnerable individuals include those who:
i. Work in the gig economy,
ii. Have been out of the workforce for a few months (e.g. parental leave, retrenchment or redundancy), or
iii. Are self-employed and continue to work on reduced incomes while sick or injured to keep their business running.
• This calculation may significantly reduce benefit payments when an individual is at their most financially vulnerable.
MetLife will provide updates as discussions with APRA continue and further clarification is provided.
4. Replacement Ratio measures:
a) 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, and will not exceed 75 per cent of the life insured’s income for benefit payments that are longer than six months.
• Ancillary benefits for specified injuries or traumatic conditions that make payments based upon particular events, and not based upon the life insured’s ability to work, may be eliminated.
• Insurance companies would be prohibited from “pay and close” processes that pay an anticipated duration of claim (i.e. broken leg = four months), as it may breach the 100% income rule if the insured returned to work after only two months instead of the expected 4 months.
• Based on current guidelines insurance companies would be prohibited from commuting a payment.
5. Maximum benefit payment of $30,000 per month to encourage individuals on higher incomes to self-insure.
6. Five year measures:
a) Policy term of the contract shall not exceed five years.
b) 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.
c) 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.
• Removes certainty for the client (no longer guaranteed renewable beyond five years)
• Increases administrative burden for both advisers and clients.
• Clients may be unable to obtain cover if their occupation is no longer insurable.
• The insurance company may have ceased to offer an “on sale” product.
• Increased administration costs for life insurance companies may lead to increased premiums.
7. Longer benefit periods must have more stringent disability definitions.
• Reduced protections for clients compared to current environment.
• The definition of ‘totally disabled’ could be modified from an ‘own occupation’ definition at time of claim, to an ‘any occupation’ definition if the life insured has been on claim for a defined period of time (possibly two years based upon previous legislation and product design).
• Sudden elimination of benefits because the rules changed regarding the definition of disability, that could have a significant financial impact on the customer.
Summary
APRA has proposed significant changes to Individual Disability Income Insurance, that are due to have a phased implementation on 1 April 2020, 1 January 2021, and 1 July 2021. These measures are likely to reduce or eliminate benefits on new IDII policies and result in increased premiums on existing Agreed Value policies (please check with your product provider). There is an expectation, however, that these changes will move IDII products to a more sustainable state, which is in the interest of your clients which ultimately may result in an improvement to premium rates for new policies sold under the proposed changes.