CoreData’s Kristen Turnbull reflects on the recent announcement of APRA’s intervention to address income protection insurance sustainability, and the challenges this intervention may present – especially for risk-focussed advisers and for consumers…

The regulator issued a clear directive to life companies this month: provide proof you’ve changed the way you offer disability income insurance or be prepared to face sanctions.

In an open letter to life insurers and friendly societies, the Australian Prudential Regulation Authority (APRA) set out a number of measures aimed at shoring up the sustainability of the product.

As CoreData wrote recently, the sector made a $1.1 billion loss on individual disability income insurance (income protection) in the year to June 30, 2019.

APRA had previously signalled its intention to act, when it released a letter in May this year outlining expectations for improvement in a number of areas relating to pricing and product design.

In its latest correspondence, APRA outlined three key measures:

  1. Consequence management – An upfront Pillar 2 capital charge that will take effect on 31 March 2020 and remain in place until life companies demonstrate sufficient and sustained progress against APRA’s expectations
  2. Managing riskier product features – the removal of agreed-value contracts and a maximum duration on new policies of five years (from July 2021)
  3. Data – contributing to APRA’s data collection on individual disability income protection and industry experience studies

Interventions are not uncommon in the financial services industry. In recent years, we’ve seen the Financial Adviser Standards and Ethics Authority (FASEA) impose new education standards on advisers; licensees made to rethink vertical integration post-Royal Commission, and super funds forced to cancel default insurance on low balance accounts from April 2020.

But with a stick approach, there are always unintended consequences.

One of the problems that has historically plagued the sector is the fact that insurance in general is sold, not bought.

This is largely because people don’t like paying for things that they hope to never need. Thinking about our mortality, or the prospect of being unable to work due to sickness or injury, isn’t exactly a joyful experience, and it’s human nature to avoid situations that make us uncomfortable.

A critical role of a financial adviser is to force us to have those uncomfortable conversations. By doing this we make sure we’re prepared for the worst, so that we and our families are at least financially – if not emotionally – equipped to deal with the situation.

The latest claims and disputes data from APRA and ASIC shows a 105 per cent claims payout ratio…on individual non-advised income protection

For this reason (and many more), advisers are a vital channel for life companies to take their products to market. But in recent years premiums on income protection have been rising, due to the low interest rate environment (meaning life companies are earning less from their capital and policy reserves) and an increase in claims – in part due to a product design quirk that means in some instances claimants are better off not working.

The latest claims and disputes data from APRA and ASIC shows a 105 per cent claims payout ratio (the dollar amount of claims paid out as a percentage of the annual premiums receivable) on individual non-advised income protection* in the 12 months to June 2019, and a 68 percent claims payout ratio on individual advised income protection policies.

With income protection premium affordability becoming a major issue, it is getting harder for advisers to convince their clients that the benefits outweigh the cost of the cover, notwithstanding the tax-deductibility of premiums as a potential selling point. Further, policies offering first year discounts are only going to come back to bite clients later – not a great way to build customer loyalty – and advisers risk a substantial 60 percent clawback of their initial advice fee if the client chooses to discontinue their cover when the honeymoon period is over.

there’s a real risk that changes to disability income protection could result in fewer of these policies “sold” by advisers

The sustainability of income protection clearly needs to be addressed. It’s simply not sustainable for an industry to continue to make large losses on a product, and life companies now have a regulatory imperative to act.

But just as there’s a real risk that the introduction of FASEA-developed standards could see a reduction in advice capacity, there’s a real risk that changes to disability income protection could result in fewer of these policies “sold” by advisers.

Many consumers already question the value of insurance, in fact, CoreData’s research suggests the number one barrier to take up of life insurance generally is “I don’t see a need for it”.

Making pricing more sustainable and reducing the risk of lapses is likely to see fewer life companies offering substantial first year discounts on policies – essentially making these policies appear more expensive on face value (even if this isn’t the case in the long term) to already cost-conscious consumers.

Regardless of how the industry responds to APRA throwing down the gauntlet on IP, advisers – many of whom are struggling to deliver risk advice profitably due to the reduction in upfront commissions under the Life Insurance Framework (LIF) – will have their work cut out to make income protection a viable and attractive consumer proposition for the future.

*Disability income insurance has recurring monthly payments. For the purposes of the reported claims ratio, total payments are approximated using an average 24-month payout period. 

Kristen Turnbull is Director, CoreData WA and responsible for life insurance research within the CoreData Group.



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  1. Seems to me its more of an issue with the claims ratio on non-advised business.
    If all business was written by advisers, the industry may be in a a more sustainable, profitable position.
    I think the lesson is there for the insurers if they want to see it.

  2. That was stunning to read that the claims payout ratio was 105% for non-advised policies. Clearly these are industry fund policies and perhaps a few direct policies but they seem to be responsible for the bulk of the losses. Is there any other substantial volume of non-advised policies? It also shows what happens when insurance companies compete for a small number of buyers (industry funds) rather than go through their adviser network.

    Why is APRA not distinguishing between these two types of policies if the payout ratios quoted above are correct? It does not seem to make sense to make a well-working product (adviser-based IP) harder to access or to offer to clients with important features missing.

    This is really strange.

  3. George – you have just put your finger on one of the real issues. This appeared in “Professional Planner” this morning

    “Some say the real catalyst for APRA’s move, however, was the increasing reluctance of re-insurers to take on risk from the flawed policies direct insurers were providing.
    “Re-insurers were particularly badly affected in 2014 initially masking the position of direct insurers,” Rice Warner stated in May. “Now it is evident both groups are struggling with continuing losses.”

    And which organization makes the flogging of un-advised DIRECT products easy, by championing GENERAL ADVICE – that will be ASIC.

    So it seems those 40% of DIRECT clients who did not LAPSE their policies in the first year have caused CLAIM CITY. People forget that one of the key services provided by specialist risk ADVISERS is to act as the insurers eyes and ears – its called FIELD UNDERWRITING! Many years ago an underwriter told me that unless there was an adviser eyeballing the clients when ä policy was set up, there was always a risk the insurer could agree to cover a “one eyed, one armed, powder monkey”who was in-accurate with the truth. That particular underwriter would refuse to cover clients who the adviser had never actually eye-balled.

    Callers can lie to their hearts content talking to a call-centre backpacker on in incentives.

    And finally a thought on the 5 year IP offerings. Advisers, acting in best interests of the client, surely must be obliged to tell that clent that when the nasty set of policy terms arrives on the FIFTH policy anniversary, that, health non withstanding, the client would be better off with a new policy on better terms.

    Isn’t that called CHURNING !

  4. Wow… Factual evidence that non advised policies are 54% more likely to be claimed against than advised policies. It would also be interesting to see the average claim duration for non advised Vs advised. It seems most of the problems would disappear if APRA ensured more advisers were involved or that product limitations were restricted to non advised cover. Oh, but pretty soon there might not be insurance advisers and claims in general could go up by 54%…

  5. The story we have been told for many years, is that there is no cross subsidization between advised and non-advised Insurance.

    That seems to have been a lie.

    The fact that non-advised Insurance has paid claims at 105% of premium, tells us that the non-advised pricing has been too cheap and now the advisers who have always done the right thing, are going to be impacted again.

    When will it end?

    Australia is the Titanic and full speed ahead. Is that an Ice-berg? How wonderful.

  6. Guys before we get too excited, I think it’s important we note that the non-advised result predominantly represents group GSC business NOT direct marketed insurance, which has been repeatedly labeled ‘junk insurance’ based on the LOW loss ratios.

    Regardless of the non-advised result, a claims ratio of 68% is still NOT profitable and therefore not representative of a healthy or sustainable product (or pricing). This number represents a ratio which could be calculated in multiple ways, but at its most basic is claims dollars paid for premium received; and likely does not take into account distribution, operating and overhead costs, which could easily be 50% or more of premiums received.

    Just as many risk specialists are choosing, or have no choice but, to exit the market, unfortunately the reality is more dire than it just being difficult to sell IP as Ms Turnbull notes; we could well see insurers exiting the IP market altogether, just as we have seen in the UK and US in the past.

    This would lead to reduced competition and soaring price increases on in force policies, with healthy clients choosing to cancel their cover and therefore less premium received for a shrinking pool of claiming and/or unhealthy clients. The regulator(s) cannot have that or another HIH happen on their watch. The recommendations from APRA may seem very tough at first glance, but will actually have little impact on the income replacement ratio which is one of the prime drivers behind ‘some’ claimants being better off not working. So arguably the regulator has not gone far enough but is rather firing a warning shot across the bow.

    If you want an Age 70, agreed value, now is the time to get it – Just don’t bank on being able to afford it for very long!

  7. Its very sad to see the rapid decline in the industry and i see much more skilled people leaving which is far beyond industry predictions. Its now becoming unethical to the public and restrictive to those in need simply because what I imagine is the high costs to get advice. I entered this business for a particular ethical reason some many decades ago and its been far to much for me for the last year and a half. Mental disorders are not handled well at all with insurers and they are complicit to exacerbate the situation. frighteningly, i have learned that they dont really know how to deal with these people. Thankful Ive got a agreed value IP to 65 and TPD claims may well be admitted before IP…..strange and embarrassing. if you can still open your emails, then you are deemed to be partial. They are tripping over themselves now with so many claims. I dont see the RC followed the goverment guidlenes on conducting the RC and clearly breached their mandate.

  8. yep all these people who know nothing about the insurance industry are the cause of its great downfall- clueless politicians, inept lawyers, regulators, the Royal commission the whole lot have stuffed it up. Good on ya’s. Im exiting stage left. hasta la vista baby!

  9. yea good luck with that one APRA. I for one won’t be recommending any 5 year IP policy on 12 month indemnity policies to clients and doubt many responsible advisers would particularly for the self employed. Self insurance looks the new way to go.

    • If we’re not recommending IP to clients, even the cut-down post-APRA intervention restricted versions, how will we satisfy BID?

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