Disability insurance costs outrun returns
Disability income insurance claims costs are running at around 20 per cent to 30 per cent above levels that would deliver a reasonable return to shareholders, with the likelihood that insurance companies are simply adding losses to their books with each new retail sale.
That is the assessment of the largest re-insurer of disability income insurance in Australia — Munich Re's Munich Holdings Australia.
The research paints a grim picture of the disability insurance market in Australia with the following key underlying findings:
- The long-term cost of claims is significantly higher than allowed for in office premium rates.
- The cost of DII claims has been increasing over the last decade. This is due to an increase in the incidence of claims, rather than any change to the recovery rates of DII claimants.
- The rate of claims due to sickness increases with policy duration. The increase is significantly higher than the industry is pricing for. Sickness claim rates for policies in force for 12 years are double that of policies in their first year.
- The incidence of accident-related claims (overall) is increasing. From 2009 to 2013, there was a significant increase of 47 per cent in the rate of accident claims occurring.
Commenting on the research, MHA Head of Life, Andrew Linfoot said it had revealed the product challenges confronting the industry in Australia.
"Price, while a major factor, is just one of the key factors contributing to the state of the market," he said. "Over time, DII benefits and other terms and conditions have become more generous, which has contributed to increasing claims costs."
Looking at the outlook for the sector, Linfoot said that while insurers might be reluctant to move, he questioned the extent to which products could be sustained in the longer term, if steps were not taken to develop a more sustainable offering.
"Industry participants may face a scenario where their products quickly become unaffordable to the many Australians who rely on such products for their financial protection," he said
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