DII products do not work well for chronic conditions

6 September 2019

Disability income insurance (DII) products and the way they have been designed do not work well for prolonged periods of disability or chronic conditions, according to the analysis by major reinsurer Gen Re.

On top of that, the study said that there was no financial incentive to minimise the loss of income. Also, the past losses were not caused solely by mental health claims nor economic factors such as lower interest rates or low wages increases.

The analysis also found that the way DII was being sold, via independent advisers and how they renumerated, was not the key problem.

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However, the main contributors to the DII misery included the generosity of the products which delayed early return to work, a claims handling approach and the “eternal hope that a worsening trend will ultimately plateau and rate increases will restore profitability.”

Therefore, in order to improve the situation, DII required a concerted effort from multiple parties, which would include the Actuaries Institute to provide more robust advice on valuating DII business and the Australian Taxation Office (ATO) to review taxation of DII premiums and benefits.

Additionally, the Australian Securities and Investments Commission (ASIC) and the Australian Prudential Regulation Authority (APRA) should further supervise the ratings houses and how their ratings and scores were used while insurers would be required to radically re-design their products.

Other steps were:

  • A claims handling process that sets clear expectations even before a claim is submitted;
  • A claims team that is continually trained on medical, financial, occupational and rehabilitation matters;
  • A government that promotes rehabilitation and gives life insurers the opportunity to reimburse costs associated with rehabilitation;
  • The reinsurers to offer capacity for DII without the need for cross-subsidisation; and 
  • A media that focusses on premium sustainability and processes instead of hand-outs.

“But most of all, it requires the insurers to fundamentally re-design the current DII product, to align the claims management capabilities with the new product and to fine-tune the underwriting. It can be more generous in parts but overall must adhere to simple insurance principles,” the analysis concluded.

“With few large players in the market, the myth of first mover disadvantage disappears. It is time to lead the change and benefit from it.”

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