The Challenge of Income Replacement Ratios

As the financial advice sector awaits the roll out of the new generation of income protection insurance products in the second half of 2021, we’re keen to learn your views on some of the key changes which may be coming your way.

Based on comments made at last weeks’ 2021 FSC Life Insurance Summit in Sydney, it seems that most insurers are yet to finalise their new IP offers, where the take-up rate of these yet-to-be-launched products will be a critical factor in determining whether individual retail IP products will remain a future part of the Australian life insurance landscape.

One of the key challenges facing the product manufacturers is how to manage APRA’s effective dictate that all insurers must avoid offering individual disability income insurance (IDII) policies with fixed terms and conditions of more than five years (see: APRA Cracks Whip…).

As the insurers grapple with the complexities associated with what happens after five years, another of the key challenges the industry faces – and the topic of this poll – is whether insurers will continue to be able to offer to replace 75% of a claimant’s income and remain sustainable.

This is a huge consideration for the industry, as product manufacturers continue to seek a competitive advantage

This is a huge consideration for the industry, as product manufacturers continue to seek a competitive advantage over their rivals …and replacement ratios is one area where the sector may see different offers emerging.

So, the challenge for insurers – at least to an extent – is to find a way to balance the two often-competing but critical factors of sustainability and competitive advantage.

The idea behind reducing an income replacement ratio from 75% to (say) 50% is that such a reduction delivers an outcome which, while less attractive to the claimant, is at least more affordable for more people.

But this is where the balancing act comes into play: At what point would a reduced income replacement ratio become uncommercial? Would 50% still work? Or will your client need more than 50% as a minimum? Can you envisage what your conversations will be like with your current and future clients around this critical question?

There’s no right or wrong answer to this question, so please let us know what you think and we’ll report back to you next week…