RISK – Choice is simple: time to save the market

Disability insurance in Australia has reached a crisis point largely thanks to the under-pricing of products carrying certain unsustainable features, argues Mark Gallagher.

The disability income market has undergone unprecedented change in recent years. The demise of many players in the United States is well known and the latest actuarial studies from the Institute of Actuaries of Australia shows a deterioration in profits. Our ability to manage this class of business profitably is under question.

We at Swiss Re Life & Health, either courageously or conservatively depending on your point of view, have been promoting discussion on the long-term viability of individual disability income (also known as income protection, or IP) business for several months.

In November last year we published a paper suggesting that significant changes are required if the products are to survive in the long term. We propose that some of the features which make these products attractive to sell should be radically altered or attract price increases of up to 25 per cent to remain viable.

Our concerns are based on the underlying, concurrent trends of recent years: a reduction of premiums whilst extending the scope of cover. Additionally, changing work patterns with increasing numbers of contracted and part-time workers have meant that some product features have resulted in many more claims than were ever anticipated when these features were introduced.

Agreed-value contracts, for example, would have been appropriate at a time of increasing inflation and when incomes were, almost without exception, expected to increase steadily over a working lifetime. Given that this is not the case now, we believe that the price for these products should be increased substantially.

Similarly, products that include lifetime benefits have been highlighted by Swiss Re Life and Health as currently underpriced.

There are two main concerns here. Firstly, it does not make sense to offer income replacement insurance beyond normal retirement age. Income for this purpose should be provided through a properly funded retirement plan. Secondly, how can disability from work be assessed when the policy holder is retired?

We recognise the popularity of this benefit is due to its ability to bring peace of mind. But we believe that "disability" should be redefined after normal retirement age to reflect the policy-holder's ability to carry out the activities of daily living, covering such things as dressing, eating and mobility, rather than their ability to work. Ultimately, we would prefer to see this feature disappear from disability income products altogether.

Another feature causing us concern is the partial disability income benefit.

Initially, this benefit was introduced to facilitate a claimant's return to work by enabling the policy-holder to claim a partial benefit to supplement income until full-time work is resumed.