Time for radical overhaul of disability insurance

11 February 2020

Moves by life insurers to increase premiums around disability income insurance (DII) are simply perpetuating potential anti-selecting lapses and may lead to worse claims experiences and falling profit margins, according to an analysis conducted by the Institute of Actuaries of Australia.

The analysis, released this week, called for substantial and urgent reform of the DII sector and has come as the institute announced the formation of a DII taskforce which has started liaising with regulators and which hopes to engage with insurers, advisers and product ratings agencies to drive long-term change.

As part of the move, the institute engaged KPMG to compile a comparative research report which found, in broad terms, that the sector needed simpler products, a reduction of ‘bells and whistles’, a change of definitions and a review of the benefits to encourage those who can, to return to better health as soon as possible.

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The convenor of the Actuaries Institute Disability Insurance Taskforce, Ian Laughlin said modern life insurance provided valuable financial benefits for people who can’t earn an income due to injury or sickness.

However, in Australia’s competitive market, customers had been offered a smorgasbord of product features but also been subjected to multiple unanticipated premium increases. 

“A decline in insurance company profitability despite these steep premium hikes has called into question the sustainability of disability income insurance in its current form, and suggests the potential for market failure,” Laughlin said.  “That raises real concerns for consumers, and the broader community, about future access to affordable DII cover.”

The report noted that life companies had collectively lost around $3.4 billion over the past five years through the sale of DII to individuals and compared Australia to other jurisdictions, concluding that Australian products were too generous with more features, higher issue limits, longer benefit periods and shorter waiting times.

It pointed to the UK where employees were provided with services that allowed them to return to work before they were eligible for payments and said that, by contrast, in Australia there were limits on what early rehabilitation services could be offered, particularly when a policy was written through a member’s superannuation fund.

Daniel Longden, KPMG actuarial and financial risk partner, said: “Our research found that Australian workers tend to have higher payouts than their counterparts in comparable jurisdictions.  A replacement rate of 75% of earnings is quite common in Australia with up to 80% replacement ratios available”.

"By contrast replacement rates in the US are generally 50-65% of income, and in the UK 60-65% of income,” he said.

"In some circumstances, where an Australian policyholder has an income replacement ratio of 75%, the policy may typically permit more than 102% of pre-disability take-home pay. A high replacement ratio can be a disincentive to returning to work.”

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I keep reading about what the policies should look like in the future. But no discussion around what companies/APRA will do to protect existing policy holders with these "generous" policies. As we have seen before, companies jack premiums up so people cancel them. It isn't the policy holders' fault these products aren't profitable. There needs to be protection in place for existing holders against the companies.

You know what else the UK did after their over regulation killed the industry? Increased Adviser commission rates! Increase the pool of policy holders, get more people insured, and watch profitability return.

MM, Mike, you are spot on.

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