In recent years, we have highlighted the importance of ensuring you have the best possible Income Protection (IP) insurance in place prior to the Australian Prudential Regulatory Authority’s (APRA) staggered implementation of a number measures to force insurers to be more conservative in their IP product offerings; commencing with a Special Communique to our clients on 20 December 2019.
Further communications on this subject can be found in the News Archive on AFRM’s website here.
The reason we are highlighting this issue again now is that the final changes to regulations dictating how future Income Protection must be structured will come into effect from 1 October this year. These changes will reduce the financial protection and some of the certainty provided by current products.
So, if you are not sure if you have the best possible Income Protection solution in place, now is the time to review it. Or perhaps you know someone who may need to get theirs up to date before IP Income Protection contracts become more restrictive from 1 October?
The changes to come into effect from 1 October 2021 include:
Tighter restrictions on Income Protection claim payments
For new IP insurance contracts, claims payments can only be based on annual earnings at the time of the claim event, not older than 12 months; and for policyholders with an income that is variable, the “income at risk” must be based on “average annual earnings over a period of time appropriate for the occupation of the policyholder and reflective of future earnings lost as a result of the disability.”
Reduction in Income Replacement Ratio for claims
The total insurance benefits payable under new IP insurance contracts, taking account of all benefits paid under the IP insurance contract, must not exceed 90 per cent of earnings at time of claim for the first six months of the claim and do not exceed 70 per cent of earnings thereafter.
New limitations on Policy Contract Terms
All new IP insurance contract policy terms must not exceed five years’ duration.
However, new policy contracts may allow the policyholder the right to enter into new policy contracts upon the expiry of the existing contract for further periods (not exceeding five years), without a medical review, on the terms and conditions applicable to new contracts then on offer by the life company.
Changes to the policyholder’s occupation, financial circumstances and dangerous pastimes should be updated upon renewal and reflected in the new policy terms and conditions.
Restrictions on the Benefit Period of new Policy Contracts
All life insurance companies must have effective controls in place to manage the risks associated with long benefit periods, including specific product design features.
To clarify, APRA says:
“Currently, the majority of IDII (Income Protection or IP) policies have long benefit periods, typically to retirement age.”
“APRA understands that there may be a legitimate need for products of this nature, and acknowledges that there is nothing inherently wrong with this product feature. However, if the risks associated with long benefit periods are not managed appropriately, they can detract from claimants’ motivation to return to work and have an adverse impact on claim duration. Long benefit periods may also exacerbate the impact of other problems in product design and controls.”
Put simply, the changes outlined above mean the benefits payable under any new IP policies put into place on or after 1 October 2021; even if the benefit period continues to be until age 65; the terms and definitions are likely to be less “generous” than those available in IP products currently available on the market.
The reason APRA is introducing these changes is to encourage good financial governance within the sector and to ensure the life insurance sector remains financially viable against a backdrop of significant financial losses in recent years.
The current state of the life insurance sector was detailed APRA’s report, APRA 2020 YEAR IN REVIEW, released on 5 February 2021. It stated that the industry experienced a significant decline in return on net assets (down to negative 6 per cent in the 12 months to 30 June 2020; compared with 3.5 per cent in the preceding year).
It also noted that:
“Profitability of risk products has substantially declined in recent years. The net profit margin for 2019/20 was negative 10 per cent, considerably below the longer-term average of around 3 per cent. This result was driven largely by continued substantial losses in IDII and further declines in the profitability of individual lump sum and group business [Figure 3d].”
However, APRA does acknowledge that its efforts to force insurers to have a more conservative appetite for taking on risk means the industry remains financially viable for the long-term despite high levels of loss in recent years.
This provides you, our clients, with the “good news” that these measures will ultimately result in a stronger industry.
A life insurance industry that will be able to continue to pay claims as they arise into the future.
So, as clients, you can have faith that provided you get the right advice and put the right cover in place, you can have confidence that your own future financial security will be protected.
That said, this more conservative approach by insurers means pressure to continue to increase insurance premiums is not going away any time soon. This applies specifically to grandfathered Agreed Value IP policies and potentially also to death, TPD & Trauma policies. However, we would expect APRA’s measures to ultimately result in a stabilisation in premium levels moving forward for new Income Protection policies.
For that reason, we at AFRM, have decided to address this issue up front in our insurance cover review process with all clients this year.
All client review communications will note that the cost of insurance typically increases each year in line with increasing age, risk of claim and/or increases in level of cover. Further, we will also flag other economic and regulatory factors that are putting pressure on ALL insurers to increase premiums.
Accordingly, we have also provided an overview of the issues involved in a new Special Communique on our website, and a link to this background paper will also be featured in all client insurance review communications this year.
The background paper highlights the high volume of claims payments made by insurers in recent years and also underscores the fact that valid claims are indeed paid. It provides independent validation of this fact, citing APRA’s report that for the year to 30 June 2020, the claim acceptance rate across all life insurance cover types and distribution channels was 94 per cent.
APRA’s data also demonstrates the fact that if you have an adviser, like AFRM, assisting you with your claim, the claim acceptance rates are even higher.
AFRM has always worked with our clients with the mindset of putting in place long-term risk mitigation solutions. We build our advice based on what we know works at claim time, having achieved more than $200 million worth of claims paid out to our clients to date. When it matters most, we believe that it is our experience that makes the difference.
We appreciate the relationship we have with you and would like to assure you that any annual insurance reviews we undertake for you this year will be performed to our usual high standards.
Please feel free to review the checklist on our website if you are unsure if it is time to review your cover. Or perhaps, share it with a family member or friend? We would be happy to help.
Sincerely,
Rob Vitnell
AFRM Managing Director.
Case Study: "Good on you Sam!"
“It’s wonderful that we have been paying all these premiums all these years and we never ever thought we’d make a claim. We didn’t even know how to make a claim.”
“We didn’t even really know it was a claim. Sam [from AFRM] got involved and got us all this money and it was amazing.”
Just before 5pm on 9 February, this year, AFRM Managing Director, Rob Vitnell, got a call on his mobile number from a number he didn’t immediately recognise ‒ but he answered it, nonetheless.
It turned out to be Ivy [name changed to protect client privacy], a client Rob had worked with several years ago before AFRM Adviser, Sam Brennan, took over day-to-day management of her risk advice; and also that of her husband, Kevin [name changed to protect client privacy].
After explaining who it was on the line, Ivy got straight to the reason she was calling.
Rob relayed what she said: “Hi Rob. We spoke a couple of years ago. I have been working with Sam. I hope you don’t mind me calling but I wanted to give you some feedback.”
Rob was aware that Sam had assisted Ivy and Kevin with a Trauma Policy claim for prostate cancer in the second half of 2020 and that he was also pursuing a claim under Kevin’s Income Protection (IP) policy, which included a Trauma/Crisis Benefit, allowing for a monthly benefit payment in the event of suffering a Trauma and being unable to work.
Ivy had called Sam in September 2020, advising that Kevin had been diagnosed with prostate cancer. Sam and AFRM’s Group Risk Manager, Bev Murray, immediately initiated the claim process, advising Ivy that there were two possible claims, and commenced the process of compiling documentation for the Trauma Policy claim, given the IP policy had a 90-day waiting period before benefits are assessable/payable.
Sam took the lead in pursuing the Trauma claim with the insurer and by December 2020, had succeeded in securing a Trauma policy claim benefit for Kevin of almost $250,000.
At that time, still within the 90-day waiting period of the IP policy, the second claim was still being prepared.
With all of that background information in mind, Rob was expecting Ivy to want to talk about Kevin’s lump sum Trauma benefit payment.
Rob said: “She didn’t even want to talk about that. She said: ‘I want to talk to you about Sam.”
“She said – and I quote: 'Sam is amazing. He is very professional. He is not just professional, he is sympathetic. He will ring us just to ask how Joe is going. In fact, he just rang me today which made me think I had to ring you and tell you about it. He delivered on his promise. He got the claim paid.”
Rob recalled Ivy went on to say: “It’s wonderful that we have been paying all these premiums all these years and we never ever thought we’d make a claim. We didn’t even know how to make a claim. We didn’t even really know it was a claim. Sam got involved and got us all this money and it was amazing.”
“The experience and the process was so good. He (Sam) was really quick. He always replies. He always helps us. He explains things simply in layman’s terms. We are not very tech savvy people. We need things explained to us simply. Sam is a brilliant person and I thank you for allowing him to work with us.”
It was the kind of phone call every Managing Director dreams of getting when it comes to getting feedback about a team member’s work.
As Rob said: “How good is that? You just can’t make up those words! I was madly writing it down as Ivy was talking. No one made her call me. She felt motivated enough to pick up that phone and that is special. Good on you Sam.”
Advice for property buyers
The media and internet is full of advice for people considering buying real estate and also various rehashed checklists advising what you should do after buying a new property.
However, there is little advice online that we can find that highlights the potential impacts on your life insurances. This article by MLC is a notable exception.
If you are an AFRM client there are several things you should consider if you have bought a new property recently:
Contact us to update your address details. We will then notify all relevant insurers to ensure they have the updated details too.
If you have you taken on more debt to finance the purchase, please consider if you and your family are now more financially exposed in the event of death/disability/illness?
If the answer to the above question is yes; it may be wise to contact us so that we can review your current Financial Risk Management Plan to ensure it remains adequate for your current life circumstances.
The aim of any Financial Risk Management Plan review is to ensure that your risk requirements continue to be appropriately met and are keeping pace with changes in your life.
For example, apart from the issue of buying real estate outlined above, if have you changed jobs, changed income levels, or if your level of debt altered significantly for some other reason, then perhaps it is time for a review?
Similarly, has your family situation changed in some other way during the past 12 months, or have you been ill or injured? If the answer is, yes, then again, perhaps it is time for a review?
As we said in the lead story of this newsletter, we sincerely appreciate the relationship we have with you and would like to assure you that any annual insurance reviews we undertake for you this year will be performed to our usual high standards.
Please feel free to review the checklist on our website if you are unsure if it is time to review your cover.
