When indexed IP policy pay-outs exceed actual earnings

Many indexed income protection policies are paying out more than people are actually earning and this, in turn, is impacting claims experience, according to a white paper developed by life/risk insurer, ClearView.

The white paper, authored by ClearView’s chief actuary and risk officer, Greg Martin has argued for a fresh approach to income protection portfolios to break what he describes as a worrying pattern of rising claims and then rising premiums.

Martin argues that demand for income protection insurance should be unshakably strong because it protects what is arguably a person’s most valuable asset – their ability to earn money throughout their working life, yet many Australians are more likely to buy insurance to protect their car or pet.

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“It’s too simplistic to blame heightened media and regulatory scrutiny of the financial services industry, mounting mental health-related claims and recent price instability for the discontentment of both consumers and insurers,” he argues.

Martin said focusing on these factors alone would not properly address the issue and cited the effects of cyclical trends in underemployment (as opposed to headline unemployment) and slow wages growth as key factors behind the decline of income protection.

He said headlines heralding Australia’s almost 30 years of uninterrupted economic growth and prosperity paint a rosier picture than what the average worker was actually experiencing.

 “Income protection claims follow economic cycles, with poor economic circumstances driving increased claims. The industry’s claims experience reflects the underlying reality rather than the headlines,” Martin said.

 “On top of this, the long period of weak wages growth has resulted in many indexed insured benefit amounts exceeding policyholders’ actual income ratios, meaning the insured benefits are providing increasing income replacement ratios. Higher income replacement ratios also result in higher claims rates so there’s a double impact.”

“Income protection insurance is arguably the most important of all life insurances. No other cover directly provides protection for our most important asset; our future earnings capacity. That’s why the industry must get this right,” Martin said. 

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Okay, so here is one problem that could be rectified by the insurance industry.
Level premium policies must be GUARANTEED level for the life of the contract.
Not misleading terms such as " True level ", which means absolutely nothing as the insurer can elect to increase the level premium rates across the board at any time.
When an adviser presents the comparison data to a client and discusses the long term differences between level and stepped premium options, what is the adviser meant to explain in relation to the prospect that the level premium saving over time may not ever eventuate based on the real prospect of the level premium rates being increased.
The actuarial calculations for level premium options should be done correctly and the potential long term risk factored in. The actuaries were able to do this for Whole Of Life insurance policies for many,many years and so it is essential that advisers and their clients can make a decision based on a guarantee.
The insurers should not be able to refer to premiums as level unless they are guaranteed never to increase from inception other than the increase with CPI or if the client elects to increase the insured benefit.
If the latter were to occur, only the increased component should be subject to the clients current age at the time, not the existing insured benefit, but I have also seen instances where the full insured amount can be assessed at the clients current age and the level premium calculated accordingly....this is unacceptable.
Stepped premiums increase with age...Level premiums do not.....simple explanation to the client.
Ten years down the track the client cops a 25% increase in their level premium rates totally eradicating any benefit of their initial decision and resulting in them paying premiums far in excess of the stepped premiums they could have applied for........unacceptable, misleading and deceptive.

Hear hear. How hard can it be in the world of decreasing commissions and 'lower for longer' risk free return rates to calc a guaranteed level rate which ensures that good advice remains so for decades. Furthermore, I am sure its lovely for projected revenue and annual reports to wind up the total earnings coverage (and price accordingly) by 5% every year, in the face of a decade of stagnant wage growth that appears to be the new norm. What do you think is going to happen when someone is paying for coverage that grossly exceeds their own income?! How about reflecting the real world, and perhaps you might have a better chance at providing a product that stays true to label.

Mike you forgot to mention that the insurance companies are also picking up more in premium on the new indexed amount of cover...... They normally index at 5% is this a “normal” increase ...... Oh and premiums have still stayed the same whilst paying out less commissions to advisers and having a 2 year clawback for further protection .....

Can someone explain how claim rates increase if indexing causes income replacement ratios to increase? Surely a claim is only paid if the insured satisfies the relevant medical assessment criteria, regardless of income replacement ratio?

I can understand how higher income replacement ratios might incentivise more exaggerated mental health claims. But surely the real cause of the problem in this case is insurers' reduced willingness to contest mental health claims, and increased willingness to pass the cost of these claims onto other policy holders through increased premiums?

The insurance companies want it both ways.
They tailored their quote system to automatically index premiums annually and if they were also stepped premiums, then the premium was further indexed on a rate for age basis. They took the punt that many clients on a guaranteed monthly benefit wouldn't claim thereby increasing the company's premium pool for those who did.
Unfortunately if even on a guaranteed monthly benefit when there is a partial claim, they all call for current tax returns to minimise long term partial claims.
They shouldn't bleat if they introduced this system and it hasn't panned out exactly how they figured it might.
It's like commissions.
The Life companies introduced up to 100.)% initial commissions with a 12 month lapse/cancellation write back responsibility.
A few recalcitrant advisers took advantage of the system by "churning" and the life companies used the whole industry as a scapegoat to change a system that was not introduced by advisers .. but by the life insurance industry,.
How lucky are we ?

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