A note to referral partners from AFRM Managing Director, Nick Hatherly - 23 December 2019
Re imminent changes to IP insurance:
AFRM would like to draw your attention to significant and swift changes proposed by the Australian Prudential Regulatory Authority (APRA). They are moving to discontinue certain types of Income Protection (IP) insurance available in the market and this prompts us to counsel that now would be a good time for your clients to review their circumstances. Or even encourage them to tell family members, friends etc. to review theirs as well. This includes anyone with a current Income Protection (IP) policy and anyone considering taking up such cover because APRA is discontinuing IP products with more generous terms from early 2020. Our advice is that prior to the first round of product changes becoming effective from 31 March 2020, it would be prudent to consider how these changes affect your clients. We would encourage you to feel free to contact us prior to our Christmas shutdown (24 December 2019), or first thing in the New Year (6 January 2020), if you have clients that require a review given that the process of implementing new insurance cover can take time. The key changes that will impact consumers include APRA’s order that insurers must:
cease the sale of Agreed Value IP policies (effective 31 March 2020);
ensure IP benefits do not exceed the policyholder’s income at the time of claim (effective 1 July 2021),
avoid offering IP policies with fixed terms and conditions of more than five years (effective 1 July 2021); and
ensuring effective controls are in place to manage the risks associated with longer benefit periods. (effective 1 July 2021)
For your reference, the full APRA letter to insurers is available on the APRA website at: Sustainability measures for individual disability income insurance From AFRM’s perspective as a financial risk management adviser, the proposed changes are concerning in that they seem to be signalling an end to the level of client protections currently enjoyed in today’s IP insurance contracts. At a minimum we face considerable uncertainty in the market until we can see the wording of new IP policy contracts. However, based upon the flagged product changes, we make the following observations:
If no Agreed Value policies are allowed (providing a guaranteed sum insured benefit), it means the only available products will be Indemnity benefits (a claim benefit assessed based on your earnings prior to disability / illness). In our experience, we foresee this outcome adversely affecting some claimants. Under an Indemnity benefit the claimant can be significantly disadvantaged because they may be assessed to be not earning enough income to warrant the payment of their full insured benefit.
Restricting cover to just five-year benefit terms will reduce the amount of certainty when compared to current IP contracts because the terms of your insurance contract can be changed if you want to renew your cover for another 5 years. As we know, that timeframe is a stark contrast to currently available “guaranteed renewable” contracts through to age 65 (or even 70 in some cases). Anyone with variable employment (incomes or occupation changes) through the course of their working life will potentially have the terms of their contract changed. Without the guaranteed renewability the current products provide, uncertainty and variability of potential outcomes becomes a stark reality at claim time.
“Effective controls to manage the risks associated with longer benefit periods.” APRA has flagged that a potential option here is to mandate more strict assessments of disability if the claim lasts past a certain time frame. We have seen this type of contract before in Group-offered cover inside Superannuation where after a certain period of time on claim (usually two years), the definition moves to an assessment similar to Total & Permanent Disability. The risk is for policyholders financially impacted by their disablement to not meet the later, more strict definition. They can be left without an income as they either try to get better (a harder proposition when you have no income) or their disability gets worse. In addition to the issues detailed above, this intervention may also ultimately mean a higher capital requirement for insurers to hold in reserve to pay future claims. This, of course, is likely to manifest higher premiums across the board. So, we can expect some industry-wide rate rises for products that are already seeing double-digit cost increases this year in some cases.
All these issues mean risk advisers, general financial advisers and indeed our clients have further market uncertainties to consider in the coming months. As we have previously counseled, any reaction to significant insurance premium increases should be carefully considered. Once you lose your existing cover, you will not ever be able to re-establish it in the same form as it is today. This fact is only made more certain by APRA’s market intervention this week. That said; new market circumstances may prompt new ways of approaching your cover costs. For example, depending on your individual circumstances, now may an appropriate time to consider “level premiums.”
Level premiums start higher than the alternative,“stepped premiums,” but the premium charged will be based on your age at commencement. Because level premiums don’t increase each year with your age, they can give you more certainty on cost when planning for the future. Your level of cover can still keep pace with inflation and/or be adjusted up or down (involving a proportionate increase/decrease to the premium) at the time the change is applied. Depending on how long you hold the cover – and as long as you can afford them – level premiums can save you money in the long-term. If you have any concerns about any of the news shared in this communique, we urge you to get in touch with AFRM. We can assist in reviewing your or your clients' cover and locking it in for the long-term before the announced changes take effect. Of course, it is important to note that existing policyholders’ terms will not change. That said; it may be wise to review existing cover to confirm it remains appropriate for current circumstances before the ability to maximise IP protection is permanently lost. Yours sincerely, Nicholas Hatherly. Managing Director AFRM