The days of Agreed Value DII have ended

3 December 2019

Agreed Value policies will become a thing of the past under the Australian Prudential Regulation Authority’s (APRA’s) tough new approach to disability income insurance (DII).

The regulator has made its position clear to the major life insurers, listing the ending of Agreed Value policies at the top of a list of things it expects the industry to do to address the ongoing problem in the DII space.

It said that it expected of the life companies that they would better manage riskier product features by:

  • ensuring DII benefits do not exceed the policyholder’s income at the time of claim, and ceasing the sale of Agreed Value policies;
  • avoiding offering DII policies with fixed terms and conditions of more than five years; and
  • ensuring effective controls are in place to manage the risks associated with longer benefit periods.
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The approach came at the same time as APRA announced the imposition of a upfront capital requirement on all individual DII providers which would become effect from 31 March, next year, and would remain in place until the insures could demonstrate they had taken adequate and timely steps to address the regulator’s concerns.

APRA has also signalled that insurers are likely to face higher regulatory costs in circumstances where it will upgrade data collection around DII.

APRA executive board member and former insurance company executive, Geoff Summerhayes said the regulator had felt obliged to act because life companies had collectively lost around $3.4 billion over the past five years and at least one major reinsurer had indicated it was no longer prepared to reinsure individual DII.

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Agreed value policies are a key part of building financial security for clients. This appears to me to be a poor move.

It appears that almost daily regulations are being introduced on the run by these overpaid public servants.. What are they thinking? If somebody is incapacitated due to illness or accident, they may not be rehabilitated after 5 years and that their financial commitments need to be accounted for. It will only be a matter of time before insurance premiums sky rocket beyond what they are today. I suggest, APRA, tread carefully, as you could create something catastrophic.

Why offer Income protection insurance at all ?
APRA, I think you're onto something here !
We now have fewer life companies than we ever had which means less competitive premiums and products.
We now have inferior Income protection contracts now being offered by "me too" insurers, so there is almost no product differentiation in contract terms or premium.

Why don't the insurers just withdraw risk products from the market altogether and let the government pick up the tab through social services.
It just shows how out of touch you all are,... if you think this is the way forward.

This is nuts! Agreed value policies are a major point of differentiation for individually underwritten policies and a huge benefit for self employed clients when we go the extra mile and have their policies financially underwritten at the point of entry. Unfortunately, we seem to be dictated to by a plethora of wage and salary earners who have no understanding of the vagaries of being self employed. This will blow up as a major PR nightmare for the insurers, many of whom work hard to keep their compact with advisers and policy holders. I can see the headlines now - Insurers accused of not paying the full sum insured!

It appears the Public Servants at APRA who are not qualified in, have never worked in, and have no experience in Financial Planning, Risk Insurance or Risk Management are making some very dangerous broad sweeping statements for which the consequences they simply do not understand. Agreed Value Income Protection Policies are a valuable option for consumers and so god help us all if these APRA bureaucrats think they know better and can dictate what a consumer chooses or what an Adviser recommends. It would be the same as APRA dictating to car insurers that they can no longer offer Agreed Value car insurance.

I'm not sure how much risk the other people commenting on here write, but the proposed changes absolutely need to happen, otherwise no one will be able to afford income protection cover. Surely cover with more limited terms is better than none.

The idea that you can take out a policy when you're earning $200k on an agreed value basis and then stop working altogether a few years down the track but still be covered for that amount is crazy.

Other changes they could make are removal of ridiculous ancillary benefits like the Scheduled (Specified) Injury Benefits, why should you get paid a months benefit because you broke your collarbone with no requirement to miss even one day's work?

Limiting all mental health claims to 5 years would be a game changer for controlling claims and premium increases.

It can't be left to the life insurers to make these changes as they have no idea how to run a sustainable business. Look at the crazy discounts being offered right now....BT offering a 25% discount on lump sum cover that only lasts one year. Still chasing new business but at the same time jacking up rates on the existing book. It's a mess.

At least someone gets it. $1bn lost since May - it doesn't matter how useful a product agreed value IP is, that sort of financial profile is not even remotely sustainable.

If the benefit periods also drop to 5 years, then what adviser would write it with a 2 year claw back on commissions - so fee for service, but that will mean lower take up or clients will go online and get inferior outcomes, leading ultimately to underinsurance.

The benefit period has no relation to the clawback period. In fact, a shorter benefit period would mean a lower premium from the outset and a much higher chance the policy will still be in force 2 years later.

I am a big advocate for agreed value cover for both self-employed and employed and also for long benefit periods.
However, I understand that Australia is one of very few companies in the world that continue to offer these two valuable features - when I started in the industry neither were available to clients, nor was trauma.

Remember when we could offer Lifetime benefit periods? I'll wager not many policy owners have retained those policies once insurers realised their exposure. I myself have an income protection policy commenced in the 1980s (on level premium thank goodness!) where to qualify for claim I only need to be absent from work for longer than the waiting period due to illness or injury & under a doctor's care. Imagine trying to buy that definition today.

Removing DII features such as these have been talked about for decades, so it is no surprise to me that APRA is now taking this approach. Quite frankly, I am at my wit's end, trying to keep older clients covered with premiums rising sharply year after year. Insurers need to take some action or no-one will be able to afford cover.

I'll miss agreed value and age 65 and age 70 benefit periods, knowing how valuable to clients they are. But if the cover is more affordable, whatever the product design looks like, I will at least know people will purchase and be able to continue to hold it on an affordable basis.

The big message for our clients already holding the better products is never let them go. You will never get something this good again.......... so long as you can afford the premiums that will continue to rise.

At least now we have more generous TPD definitions and trauma products that may be able to make up some of the shortfall caused by shorter benefit periods.

I remember Lifetime benefit periods? and I also remember stopping to offer and then start putting up insurance premiums every year with crazy increases until the insurance became affordable sickening....

APRA is missing a few completely obvious points as usual.
1. Why are insurers offering discounts on new business for IP? The very same products making a loss.
2. Insurers are top heavy on management, sales and underwriting staff who are paid ridiculous salaries. When you have sales and underwriting earning more than doctors and senior management earning more than brain surgeons, isn't it obvious where some of the losses are coming from?
3. If you outlaw agreed value there needs to be steps in place to protect customers who paid extra to have it. At the same time as discounting new business premiums the insurers have been hitting existing customers with huge increases in premiums including level premium policy holders. What will happen is the insurers will screw over Agreed Value policy holders knowing they can't go anywhere else.

I'm with you on the initial discounts being wrong Anonymous. Hypocritical in the the extreme. As to how Life Offices manage what will become legacy books of business, the answer is simple. We as a whole, will hold them accountable to the Financial services Council Code of Ethics that they are all signatories to. For example and I quote " Members of the FSC should give primacy to the duty owed to their customers." along with further provisions of fairness, equity and trustworthiness.

This should work out well.

why don't you also legislate so that insurers make changes to their definitions so that IP policies have the same crap features and definitions offered by industry funds.. That will sort out the profitability as we all know that those contracts are not worth the paper they are written on

@ Brett H,
You need to be better educated. about these policies !
All policies require for someone to be unable to work in their usual occupation and lose at least 80.0% of their income due to illness or injury and be under a doctors care.
If you go on a sabbatical and take a 12 months off from employment, you need to notify the insurer and all policies including agreed value ones revert to indemnity.
No one who is unemployed beyond 12 months is covered, so your assertion that someone who is not working for 5 years is covered, is a nonsense.
Secondly who could afford to pay the exorbitant IP premiums if they weren't working for 5 years.
These contracts don't cover unemployment if that's what you were alluding to.

@Aleycat, I haven't laughed that hard in a long time. I sincerely hope you don't advise on insurance. Everything you've just said is incorrect.

They are guaranteed renewable policies which means you never, under any circumstances, need to pro-actively give the insurer an update on your health, income, employment. The only time you do is when you are making a change to the policy that increases their risk.

If you have agreed value cover and stop working, the majority of policies available today will continue to cover you as per normal, with an Own occupation definition for 12 months. After that you will still be covered but with an Any occupation definition. Even then they cannot change the terms of the policy from Agreed to Indemnity it's an insurance contract!! they can't change the terms mid contract.

Yes they can. If the insurance is paid through super. The policy has to satisfy SIS act sole purpose test and cashing restriction, which renders the agreed value cover worthless if someone is unemployed for an extended period.

It is true that something needs to be done about insurance costs. Insurance companies that are losing money are less stable for long term payments and become more desperate for new policy income.

However, it is not appropriate to use regulation to mandate reduced benefits. This is nonsensical in the extreme. The problem is not in the benefits - such as agreed value - it's in the pricing of those benefits, and the impact of claims on the overall pool of capital. Higher capital requirements is a start, but it really just raises the barriers of entry for new providers, and fails to address the overall issue of unprofitable books of business.

Surely there is a better way of addressing the insurance company's failure to manage profitability than removing the security that agreed value provides to self-employed and those whose income has changed unexpectedly?

Somewhere, the actuarial assumptions have been shot out of the water. These need to be addressed in a broad market manner that allows scope for individual product development. If a person still pays for $10,000 per month cover while they are now earning a salary that only justifies $8,000 per month cover then the insurance policy should still be profitable. Standard actuarial rates of claim/administration/return were based on the original policy conditions - so there should be no loss for continuing that cover for that individual - even if they move to a claim.

Regulation is essential in all areas of corporate activity, to protect consumers, providers and ensure market stability. Market models, pricing and development however, should not be part of regulation. These should be covered through market forces and competition. Something is not right in this overall situation, but regulation should be used with care.

Agree with you in principle Michael. However where the actuarial assumptions have been shot out of the water is mental health claims. Mental health lobby groups are now far more active in encouraging clients to claim, and in intimidating insurers to pay those claims, even when the supporting evidence is far from clear. Agreed value policies exacerbate this problem because making a mental health claim is now an attractive option for people whose careers have gone backwards and they no longer earn as much as their agreed value IP policy. And they can use their career decline as "evidence" of their mental health problem!

If IP premiums were increased to cover the true actuarial risks that mental health claims now pose, most clients would be forced to cancel their cover and the whole IP market would disappear. The only solution is to remove mental health from private sector disability insurance and let the government look after it. Removing agreed value policies is tinkering at the edges and avoiding the main issue.

Yet again, well-meaning regulation brings about unexpected changes. From my personal viewpoint, the absolute basics of insurance have been undermined - with "buyer beware" being thrown out the window as an outdated concept. The average punter is now better off making a claim for just about any wrongdoing - whether perceived or real. Once upon a time, time-wasters would generally not get much of an ear. Yet current conditions virtually guarantee a payment for any complaint, regardless of merit. This has cascaded into a system that is so focused on perfection that the actual outcomes are ignored in favour of process. Just look at the tens of billions of dollars spent or budgeted for client 'remediation'. Yet only a tiny fraction of that money will go to clients. The vast bulk will feed a bureaucracy that simply grows and grows.

I have seen the mental health claims being paid, where they perhaps should not have been. Insurers are under enormous pressure to pay up, or else face a public flogging - again, whether warranted or not.

Mental health is a very difficult subject. However, insurance claims experiences are rock solid evidence-based material that should be driving actuarial changes. The pricing *might* be an attempt to *fix* this problem but it is a blunt instrument. Why not offer a mental health 5 year claims limit with a rehabilitation feature, and try to keep premiums low, and continue to offer agreed value cover?

It's all just product pricing in the end. Regulation stifles product innovation and development. Regulation guidance, on the other hand, can be of huge benefit in assisting an industry to cope with large market shifts.

So i agree with you on mental health as an issue, and on trying to limit its impact. Not so sure about removing it entirely though. Again, that might be too blunt an instrument for something that may require more delicate surgery.

Agree with you on the mental health issue Anon. I recall when the HIV/AIDS scare hit back in the 1980s. If you wanted cover against that disease, you paid 20% extra in premium, otherwise you weren't covered for it. When trying to reduce costs for a client last year, I enquired about the savings for the client if the cover was removed, with advances in medical science, loading was now less than 1%. The risk was appropriately priced.

In 2020, the answer may be to limit mental health claims to say, two years. That may keep the costs of cover affordable across the board. My experience has been if you are off work for that long, you are unlikely to ever return to work, so time to claim on the TPD.

The problem with using further premium increases to sort out the spiralling losses is that they cause clients to rethink their requirements and lapse rates jump. Most clients are rational, or have rational advisers, so those who lapse are less likely to have made a claim anyway. The claims do not go down as much as the volume and the losses do not improve as much as you'd think. This has been exactly the issue over the past few years since in-force premiums started going up.

The answer could be even simpler.
Target market who can buy Agreed Value policies like professional occupations and office workers and price them accordingly.
Then target market self employed trades people with Agreed Value policies and price them accordingly.
Oceanic Life when they were around actually price self employed trades people below others in the market for one specific reason.
Self employed trades people can make more money going to work than being on claim and only will claim if they physically can't work.
Then offer other the rest if they want insurance an indemnity contract, because the rest will probably buy on price anyway.

How exactly do these changes benefit consumers? Haven't all these government bodies been banging on about benefits to consumers with all the other changes in financial planning, and then they announce this! Do they even question why new business receipts are down and the impact of this on Insurers profitability? how Insurers distribution have been impacted by LIF, and other government legislation. The UK pay 220% upfronts because the same thing happened with their industry - they are addressing new business inflows, and increasing the insurance pool, but instead we impose further restrictions that will impede profitability (capital requirements) and will be to the detriment of consumers, in the form of higher premiums, and poor quality policies. Good work government

@ Brett H,
I'll tell you what, I'm a darned sight better qualified to provide insurance advice than you'll ever be.
I used to teach this stuff to advisers like you on behalf of the old LUA.
You really haven't got a clue !
Your comments in the second paragraph in response to mine were never mentioned by me.
You said "The idea you can take a policy out when your earning $200K on agreed value and then stop working altogether for a few years down the track and still claim is crazy." (quote)
That's garbage, read a policy document, you'll learn and know a lot more than you do now !
The basis of a claim is based upon you due to illness or injury losing 80.0% of your income.from one or more of your usual duties.
If your not working and not earning any money, when you fall too sick or hurt beyond 12 months, how do you think a claim is satisfied when the basic definition requires you to be unable to work and you lose 80.0% of your income.
Here's a simple question,... if your not working for a few years, what income have you lost when you got too sick or injured to work.

I be seriously worried if blokes like you are telling people the kind of rubbish you've put in your previous posts.
Could someone else please step in and set Brett H straight otherwise you better increase your PI.
Income protection insurance is not to be confused with lump sum Total & Permanent Disability insurance.
Here's a newsflash, they are not te same thing


My second paragraph was in response to your comment where you said that if you are off work for more than 12 months you need to notify the insurer, which is untrue.

I'm a bit concerned that you've thought this article is referring to personal accident and injury policies not income protection, because anyone who provides advice on income protection and has read a recent PDS would know that what you're saying is completely wrong.

You seem to think that policies only pay if you suffer a reduction in your income. Most policies provide a 3 tiered definition of disability, which includes an income based, duties based and hours based definition, you only need to meet one of the definitions to be eligible to claim.

Your "simple" question is very easy to answer, you just need to read the definition of pre-disability income in a PDS under Agreed Value contracts, not indemnity. I'll help you out with an excerpt from AIA's PDS -

"Pre-disablement Income (Agreed Value) is your highest average monthly Income for any financial year since the date two years before the commencement date of the Income Protection benefit up to the commencement of disablement."

So under your income based definition, if you suffer a loss of 80% of your pre-disability income you are totally disabled, your current income is irrelevant - hence the term Agreed Value. I don't agree with it myself, why should you be able to cover income that you're not actually generating but that's the nature of the policies as present.

You also asked why would someone continue to pay a premium to cover a non-existent income - think about a scenario for where someone has a policy in place, they want to take a few years off work, but know that they now have a health issue that will prevent them getting cover again in the future. They're happy to continue to pay the premium and to know that they'll also be covered even while they're not working. Makes sense to me.

That's the very nature of the issues around Agreed Value cover and one of the reasons Australia is pretty well the only country that offers it, everyone else recognises it's too generous and only offers indemnity.

@ Brett H,
The wording is not in the PDS, its in the policy document.
You should know the difference
The wording you quoted in the AIA PDS assumes you are working at the time of claim.
It has no relationship to the contract if you are unemployed and not working beyond 12 months.
Do yourself and me favour, contact the claims department of AIA, and say to them,
"I have a client who has a current Income Protection with you, his original insured benefit is based upon his Agreed Value benefit of $12,500 a month (viz 75% of $200,000), he has being paying his premiums but he hasn't worked for the past 5 years, can he claim, and how much will he get now that he has become injured ?
When you get the answer I expect, please feel free to be enlightened and then apologise for your lack of knowledge.
And one more thing Brett H, since I've managed the affairs of 3 senior risk underwriters and because in my previous roles I was also an underwriter before moving into the senior management of a major life company, I then went back to University before becoming a CFP..

If you take the time to read a policy document you will find in some PDS the question of being unemployed for more than 3 months and up to 12 months is also addressed and states that the policy reverts to indemnity cover,even for Agreed Value contracts !

Put your scenario as you quoted to AIA in your posts and be educated.

I'd love to just say lets agree to disagree and let's move on, but you're just wrong.

If we continue to use AIA as an example, and I've only picked them because they're first alphabetically in my PDS/policy document list, let's have a look at the definition. This is the definition from the combined PDS & Policy Document....they're not separate documents, being a CFP you should know better! :)

"If you are employed, or have been unemployed or on maternity or
paternity leave for less than 12 consecutive months immediately
before your disablement started, we will consider you to be
Totally Disabled if, solely as a result of Injury or Sickness, you are:
• unable to perform one or more of the important Income producing duties of your usual occupation for more than 10
hours per week
• not working more than 10 hours per week in your usual
occupation or any gainful occupation, and
• under the regular care of, and following the advice of, a
Medical Practitioner.

However, if you have been unemployed or on maternity
or paternity leave for more than 12 consecutive months
immediately before your disablement started, we will consider
you to be Totally Disabled if, solely as a result of Injury or
Sickness, you are:

• unable to perform the important Income-producing duties
of any occupation for which you are reasonably suited by
education, training or experience for more than 10 hours per
• not working more than 10 hours per week in any gainful
occupation, and
• under the regular care of, and following the advice of, a
Medical Practitioner.
Working hours for this benefit will equate to 25 hours per week. "

The only difference between the definition whether you've worked less or more than 12 months before disability is that the definition changes from Own to Any. The definition continues like this for each of the duties based and income based definitions.

I've had multiple people claim on policies in these exact circumstances. Why do you think APRA is going to the extreme of imposing additional capital requirements and limitations on policies?

One last thing, no one on here cares about your qualifications or past jobs, the only thing people care about is technical knowledge and with you it's clearly lacking.

Appreciate your persistence Brett. I suspect Aleycat was probably a genuine expert in his day, but those days have passed.

There are very good reasons for agreed value policies to cover people temporarily not working. Many people will have time off between jobs due to redundancy, non compete clauses, sabbaticals, family leave, study commitments etc. Most have a genuine intention to return to work within 6-12 months on a similar salary. Their agreed value IP protects them if illness prevents them from returning to work as intended. Many indemnity policies would give them very little protection in those circumstances, depending on specific policy conditions and time since last working.

But unfortunately there will be some people who game the system, particularly since the mental health lobby and the grievance media has made it much easier to do so. If agreed value is to be scrapped then the best option for many people is likely to be a more flexible indemnity definition such as "best 12 months earnings in last 3 years" as used by BT and others.

To me this is the first dying canary in the mine which highlights the unintended consequences of the life insurance reforms. Fewer life risk advisers = less advice and less people seeking advice, less new applicants taking out adequate cover - claims numbers getting completely out of balance and premium increases beyond all reasonable expectations for those who remain in the pool (people who no doubt took out cover when everyone knew someone who worked in life insurance)... My guess is that there are many contributing factors but a big one will be the lack of ‘new healthy younger lives’ entering the pool. The answer is not to dumb down the cover and disadvantage the working population (whose lifestyles and ability to repay debt / raise and educate their children / help care for their aged parents etc - is based entirely on their ability to generate income) but rather to recognise life risk is essential and reduce the red tape surrounding advice in this unique space which is effectively killing the industry. The answer is - GET MORE YOUNG LIVES COVERED! This move is a disaster and in effect runs the white flag up the pole for the Australian insurance market. It is a very sad time for those of us who passionately believe in the intrinsic value of quality insurance.

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