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:
- 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
- Managing riskier product features – the removal of agreed-value contracts and a maximum duration on new policies of five years (from July 2021)
- 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.