Current Retail Market for Disability Insurance No Longer Sustainable

A major investigation into disability income insurance has led Munich Re to the conclusion that the current Australian market is no longer sustainable.

Munich Holdings of Australasia, a division of Munich Re and the largest reinsurer of disability income insurance in Australia, conducted extensive analysis of the market, finding that the long-term cost of claims is significantly higher than allowed for in office premium rates.

The research was produced using biometric experience data from 2004-2013. Munich also decided to discard the industry-standard actuarial table, which is over 20 years old, replacing it with a contemporary new table developed in-house.

Some of the key results from this study include:

• The cost of disability income insurance 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 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 inforce 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% in the rate of accident claims occurring.

The latest Australian Prudential Regulation Authority (APRA)-reported loss of more than $390 million in disability income insurance business further demonstrates the issues the market is facing, said Munich Holdings Australasia’s Head of Life, Andrew Linfoot.

“Our research has revealed that current products typically have claims costs that are 20% – 35% above levels that would deliver a reasonable return for shareholders. This suggests that life offices are adding losses to their books with each new retail disability income insurance sale.

I question the extent to which products can be sustained in the longer term, if steps are not taken to develop a more sustainable offering

“Price, while a major factor, is just one of the key factors contributing to the state of the market. Over time, disability income insurance benefits and other terms and conditions have become more generous, which has contributed to increasing claims costs,” he said.

Mr Linfoot acknowledged the many barriers to change, saying there were many reasons why insurers may be reluctant to move.

“However, I question the extent to which products can be sustained in the longer term, if steps are 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.

In response to the findings, Munich Re has developed what it believes is a more sustainable and cost effective disability income insurance product, removing costly features that move cover away from the principles of insurance.

“The new product aims to address technical and behavioral weaknesses within the current product design, and is better aligned to the needs of the customer,” Mr Linfoot said.