Life in the Time of Coronavirus

As we all watch closely to see what our Government’s next move will be to manage the COVID-19 pandemic, I reflect on where my business was only a few weeks ago. Had you asked me if COVID-19 was likely to have much of an impact on clients of The Smart Fox a few weeks back, I may have had a little laugh and said something along the lines of “I don’t think it will have a great impact”. Well, how wrong I would have been.

Here is where some clients of The Smart Fox recently found themselves:

• One client was in lockdown in Peru
• One specialist doctor is no longer having face to face appointments with patients after the first COVID-19 case appeared in the hospital at which he works
• One client cancelled her appointment (before Stage 3 restrictions) as she was in self isolation awaiting her test result to see if she has become the next victim of the virus

All these clients either hold current life insurance policies or are applying for new life insurance policies, which could be either Death Cover, Total and Permanent Disability, Trauma, or Income Protection. So, the question is, how will these policies treat clients should they become infected and need to make a claim?

There are three ways to source insurance in Australia. They are via:

• Retail insurance (recommended by advisers and will require you to be underwritten)
• Group insurance which has Automatic Acceptance of cover without underwriting, where increases will require underwriting (often found in industry and employer super funds)
• Direct insurance (such as Real Insurance and Combined Insurance)

For the purposes of this article, I will just focus on retail and group insurance.

If you have an existing retail insurance policy, you can rest assured that you have worldwide cover, and there are no exclusions for pandemics or epidemics. To make a valid claim on your policy in the event of COVID-19, you will need to meet the standard assessment criteria as outlined in the PDS.

…I have never seen so much change take place within four weeks

If you are currently applying for a new retail insurance policy, things may be a little different. In my 20 years in the industry, I have never seen so much change take place within four weeks.

Towards the end of March, we saw a major insurer change their attitude to underwriting COVID-19 for people that are deemed to be a higher risk of infection, including frontline healthcare workers. Although the PDS may not exclude a pandemic or epidemic, at underwriting stage, the insurer does have the right to apply exclusions which change the terms outlined in their PDS or Policy Document.

You may ask whether it is fair that they can do that. That is a good question. When an insurer prices their policies, they use historical data available to them which helps them factor in the chance of a claimable event taking place. Of course, there is a chance that this pandemic will mean those assumptions used to calculate premiums need to change, and should the insurer be hit with an influx of claims from clients that are now a higher risk of being able to claim, the ramifications would be a premium increase for all existing insured lives. The alternatives the insurer has now are to keep pricing the same and just exclude the ability for a claim to be made by applicants that could be considered a higher risk, or to decline the application.

We then had the Financial Services Council step in and obtain a commitment from insurers that they will not automatically apply COVID-19 exclusions to applicants just because they work in healthcare. These applicants must go through the standard underwriting process and now can only have their cover modified in line with standard underwriting processes that would relate to any other health conditions, travel activity, residency status or if they actually have a COVID-19 diagnosis or are waiting for COVOD-19 test results.

We then move into April and now see some other new rules that have been introduced by some reinsurers. They include:

• Introduction of some restrictions on levels that cover can be applied for across most product lines
• Further caps on cover levels when clients are underwritten with a substandard outcome
• A reduction in the maximum loadings that can apply to policies across all product lines

The interesting question is how long will it be before underwriting philosophies return to what we are used to, or will these rules become the new normal?

…will these rules become the new normal?

Group insurance policies on the other hand, may take a different approach to retail policies. In March I conducted a review of 16 different group insurance policies offered by either industry super funds or leading bank staff super policies. I found some variances in how pandemics/epidemics are treated. Some policies didn’t make any reference to pandemics/epidemics at all. Ten of the 16 did.

Of these ten, most referred to excluding claims for death and terminal illness, where death or terminal illness is directly or indirectly caused by a pandemic illness, and where cover had either commenced, recommenced, or increased within 30 days. Something to note here is that some of these policies strictly apply these exclusions whereas others refer to the exclusion only being applicable 14 days from the date the insurer either advises the trustee or makes a public notification that it applies.

I did find something interesting in one policy. It basically had the same rules for new cover commencing after a pandemic has been declared, however there appears to be an absence of the 30-day rule mentioned above. It does say that other conditions apply. In this instance, my interpretation of this policy is that, should your policy with this fund commence tomorrow and you were unlucky enough to die from COVID-19 in six months’ time, your family would not be able to claim under this insurance policy.

So, what if you have had your group insurance policy in place before the pandemic was declared or your policy doesn’t make any reference to pandemics? Well, you should avoid feeling a false sense of security.

“Why is that?”, you may ask. The answer is that group policies differ to retail policies. With a retail policy, as long as you have met your ‘duty of disclosure’ obligations at underwriting and then continue to keep your premium payments up to date, the insurer cannot change the terms of the policy as outlined in the applicable Policy Schedule and PDS. This is what we call a ‘Guaranteed Renewable Policy”.

…the big question is whether any group insurers will change the rules of their policies

Group policies are not ‘Guaranteed Renewable’. At any time, the insurer and trustee can change the rules of the policy, meaning that whilst you may be covered for a certain event today, tomorrow you may not.

So, the big question is whether any group insurers will change the rules of their policies and apply a pandemic exclusion in the near future.

Again, we move into April and now we do see some changes in the group insurance space. Another review of the new PDSs dated 1 April 2020 sees one fund invoke their pandemic exclusion. Another fund has confirmed on their website that they will NOT implement their pandemic exclusion. Most funds have been quiet on any changes and their new PDSs reflect the same pandemic terms as they did in March.

I would not be at all surprised to see insurers reviewing the terms applicable to group policies. It is a very big move by the fund that has implemented their pandemic exclusion and I’m sure that would see affected members outraged. What I was surprised to see was the new PDS for the fund that appeared to apply a permanent pandemic exclusion to new, increased or reinstated cover should their pandemic exclusion be invoked,  has now modified their contract to provide full cover 30 days after cover commences.

It has been an eye-opening experience seeing how quickly the insurance world has changed given this pandemic. As advisers, we are obligated to act in the ‘Best Interests’ of our clients and as the insurance universe continues to change, I believe our clients will appreciate the value we offer them from the due diligence that we undertake when providing advice.

Providing good advice now could make such a difference for our clients in the future. Like everyone else, I never expected to see Australia in lockdown. This just goes to prove that you never know what roadblocks life may put in front of you. The good news is that we can act now to help minimise those roadblocks in the future for our clients.

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