AFRM Client Newsletter Q3 2020 - September 2020
Originally published 21 September 2020
If you have been following our newsletters over the past 18 months, you will know we have taken a strong interest in trying to anticipate changes to the market in order to continue to provide you ‒ our clients ‒ with the most timely and insightful advice possible.
We have also flagged changes to life insurance products and to changes to the marketplace itself as the regulator, the Australian Prudential Regulatory Authority (APRA), introduces measures encouraging insurers to be more economically conservative in the way they operate and in the products they offer.
A symptom of this shift in the market is increased insurance premiums ‒ something policyholders and advisers alike wish was not the case.
Recently AFRM signed a distribution agreement with a new niche insurer that is “thinking outside the box” about not only providing you with the protection of insurance cover but also creating new ways of making paying insurance premiums more attractive to policyholders.
That company is PPS Mutual. As the name suggests, the company is making what was old, new again ‒ bringing the “mutual company” business model back to the life insurance market in Australia.
That is, the policyholders become ‘members’ of the mutual and over time are entitled to share in the profits of the business.
PPS Mutual is very much a niche operator that only provides life insurance to members of the following professions:
This is how PPS Mutual describes it profit sharing process:
“When you take out a PPS Mutual policy you become a Member and pay premiums alongside every other Member.” “In the first instance these premiums are used to pay claims, cover the operational costs of the business and provide capital reserves for the future. Any surplus money is deemed as profit and every PPS Mutual Member is entitled to a share.” “Profit is retained, invested and assigned. This profit is retained in a Profit-Share pool which is invested by the PPS Mutual Benefit Fund. Then each year an assignment is made to your individual Profit-Share Account together with your share of any investment returns… “…After 10 years you can take up to 5% of your balance each year. After 20 years, or on reaching the age of 65, you can access the full amount in the Profit- Share Account.”
The Profit-Share Plan is also designed to be an ‘eligible policy, such that, broadly, payments from the Profit-Share Account after 10 or more years of continuous coverage, should not be assessable for income tax purposes.”
So, if you are working in one of the eligible professions and looking for a different kind of insurer. One in which you earn the ability to share in the profits of the business after 10 years, as means of offsetting the monies paid in annual premiums over the years. Then perhaps PPS may be the right insurer for you.
In closing, we should also state that PPS Mutual is not a new company. It is only new to Australia. As its website states:
“…Our partner company PPS South Africa have been sharing the rewards of their success since 1941. The Professional Provident Society of South Africa, known simply as PPS, was formed on 8 July 1941, during the height of the Second World War.”
“The founders, all of whom were dental professionals, sought to find a better system of financial protection having all experienced being unable to practice due to sickness or injury. They found inspiration from the mutual model adopted by the Dentists Provident Society of the UK, formed in 1908.”
“In 2016 we brought PPS South Africa’s proven business model to Australia and PPS South Africa became a founding member of PPS Mutual. It means that Australian Professionals can now benefit from specialist protection that also provides them with a share of the profits, all from a business that’s run solely in their best interest.”
Also, in this quarter’s newsletter you will find a separate story examining the state of the life insurance market and our forecast on changes to come as a result of the impacts of COVID-19.
There’s also a separate story highlighting research data illustrating that, if you have life insurance put in place by an adviser, and at some point you need to make a claim – then you can have comfort in the fact that the data confirms that the vast majority of death, total and permanent disability and income protection insurance claims are paid.
We also have a warning for anyone contemplating withdrawing funds from their superannuation as part of the Federal Government’s COVID-19 financial relief efforts.
And finally, a case study that illustrates the relationships AFRM has with its clients are long-term – often for decades. It also demonstrates that if you find yourself on a long-term claim AFRM will be by your side supporting you all the way.
Until next time. Please stay safe and well.
Sincerely, Rob Vitnell. Acting Managing Director, AFRM
“It’s a fact that with old contracts, there are times when the insurer’s own claim managers do not understand how the contracts work.”
“They simply default to interpretations based upon current policy definitions, which may be disadvantageous to the client on claim.”
The relationships AFRM has with our mutual and other clients are long-term – often for decades.
A case in point is Ben [name changed to protect client privacy].
Ben first became a client of AFRM back in the early 2000s when he was in his early 30s. He had an equally young wife and a one-year-old child.
Ben was a highly qualified young professional working in the mining survey field. His role routinely required him to go on scientific field expeditions to remote parts of the country. He was a very fit and active sportsman, so roughing it in the outback was no great challenge.
For years now, AFRM’s slogan has been:
“Protecting your tomorrow today.”
Those words are incredibly apt for this case study.
AFRM co-founder and recently retired Managing Director, Nick Hatherly, reviewed Ben and his young family’s circumstances and provided recommendations on a financial risk management strategy in late 2007, after a referral from his accountant.
By mid-2008, Ben had two insurance policies in place:
Income Protection (IP) that would provide about $3,000 per month through to the age of 65.
Term Life with Total and Permanent Disability (TPD) and Trauma cover: with benefit of approximately $200,000 in the event of his death; $100,000 in the event of TPD and Trauma. Significantly, thanks to AFRM’s advice, Ben had “Own Occupation” TPD cover.
The financial future looked rosy for this young family.
Then one day in December 2008 as Ben was driving in traffic, totally out of the blue, the car he was driving was ‘T-Boned’ by an unlicensed driver in an unregistered car.
Ben suffered catastrophic injuries to the right side of his body including a shattered pelvis and brain injury.
So severe were his injuries that Ben was put into an induced coma for weeks and remained in hospital for about six months.
To this day, some 12 years later, Ben continues to be on the IP claim filed on his behalf by AFRM.
Throughout this period, AFRM adviser, Phil Hatherly, has continued to work on Ben’s claim as his situation has evolved and ongoing negotiations were required with the relevant insurer. Following, we will attempt to summarise what has actually been years of intermittent negotiations.
Following the accident, when Ben finally got back to work, he was suffering chronic pain, memory loss and impaired freedom of movement that rendered him unable to perform at his pre-accident level. He started slowly – a day and a half a week then gradually moved up to 20 hours a week.
For the next three years Ben tried to maintain his original work role, including the rough field trips which became absolute hell.
As he was now working part time, his IP claim was on a Partial Disability basis, the benefit based upon the loss of income compared to what he was earning before the accident.
Ben eventually accepted he simply was not capable of performing his original role in the same way as he could prior to his accident, so he resigned to take up an office-bound role at significantly lower pay.
AFRM successfully negotiated with the insurer to continue to pay Ben’s Partial Disability claim benefits on the grounds that the change of job was driven by Ben’s medical and physical impairment caused by the car accident.
A year or so later, 2012/13, the relationship with the insurers became challenging yet again when Ben finally received a modest personal injury compensation payment under the NSW Compulsory Third Party (CTP) scheme.
The delay in payment had been caused by the CTP insurer handling Ben’s claim repeatedly challenging Ben’s level of permanent injury caused by the accident, even though Ben had ultimately had to have a hip replacement and had an overwhelming weight of supporting medical evidence stating his impairment was permanent and was caused by the accident.
AFRM was not involved in that process but did get involved to advocate on Ben’s behalf when his IP insurer advised its intention to ‘claw back’ a significant amount of Ben’s IP claim payments.
The insurer’s argument was based on an “offset clause” they maintained was in Ben’s contract that allegedly stated any lump sum compensation for loss of income would be treated as income received over a set period, hence it would be offset against IP benefit payments paid by the insurer.
AFRM’s Phil Hatherly successfully argued on Ben’s behalf that the original policy document issued in 2008 had no such offset clause in it. The clause had in fact been introduced in later versions of IP insurance product.
This successful negotiation by AFRM took months to settle but the insurer finally accepted this, and no claw back occurred.
Ben has since been classed as a “permanent long-term claim” meaning the burden of providing documented medical evidence of his impairment on a monthly basis was eased dramatically and his Partial Disability claim benefits continue to this day - 12 years later.
AFRM’s, Phil Hatherly, said our company’s long-term knowledge and experience sometimes gives it an edge when negotiating with insurers.
“Ben’s story is a testament to our skills of long-term claim management,” Phil said.
“It’s a fact that with old contracts, there are times when the insurer’s own claim managers do not understand how the contracts work. They simply default to interpretations based upon current policy definitions, which may be disadvantageous to the client on claim.”
Thanks to AFRM’s advocacy on Ben’s behalf, he enjoyed a smooth transition of his claim through a change of occupation, an unsuccessful attempt by the insurer to claw back benefit payments in the wake of a CTP compensation payment, and a transition to long-term claim status resulting in a significant reduction of ongoing medical documentation requirements.
That’s how willing AFRM is to stand by your clients and protect their best interests for the long-term.
Caution: Possible loss of insurance in superannuation by accessing Federal Govt’s COVID-19 relief measures
AFRM cautions anyone accessing superannuation under the Federal Government’s COVID-19 relief measures to be aware of the possible loss of their insurance in superannuation. Most Australians are aware of the Federal Government’s COVID-19 relief measure allowing eligible citizens financially affected by the Coronavirus, to access up to $10,000 of their superannuation early. Eligible individuals can apply online via myGov to access superannuation before 31 December 2020. There is no tax payable on superannuation released under this temporary arrangement and Centrelink or Veterans’ Affairs payments will not be affected. However, an implication that has not been widely publicised but is noted by the Australian Taxation Office on its COVID-19 early release of super website page, is that:
“Withdrawing super may also affect your:
income protection insurance
life and total permanent disability insurance cover.
“Insurance may not be available on accounts that have a low balance.”
“You should consider whether you need to seek financial advice before submitting your application for early release of super.”
In plain language if you withdraw the $10,000 under the COVID-19 relief package:
and your superannuation account balance is then reduced to less than $6,000
and you have not specifically opted in to keep your insurance in your superannuation
‒ then under The Federal Government’s Treasury Laws Amendment (Putting Members’ Interests First) Act 2019 your superannuation fund licensee is obligated to terminate any insurance policies you may have had in that superannuation account. So, please consider this possibility before seeking to access your superannuation early under the Government’s COVID-19 relief measures. If you are in any doubt, please do not hesitate to contact your adviser to discuss your specific situation.
KPMG / Financial Services Council study reveals large rise in life insurance claims payouts
A study of 71,000 Australian Income Protection (IP) claims during the period from 2014 to 2018 has found that benefits of $4.9 billion were paid out for policies sold through financial advisers - double the average annual payment level of the preceding five-year period (2009 – 2013).
In June 2020, the Financial Services Council (FSC) in conjunction with KPMG released results of industry-wide research that found Australian life insurance companies are paying out record dollar amounts on disability (IP) claims, including a more than doubling in claim benefits paid for mental illness.
The IP insurance claims research analysed 40,000 new claims and 31,000 closed claims (for example, where a person returns to work) from 10 Australian life insurance companies from 2014 to 2018.
IP insurance provides replacement income to policyholders when they are unable to work due to illness or injury.
The research found that the most common causes for people who made an IP claim did so due to accidents (38%), musculoskeletal (18%), mental disorders (11%) and cancer (10%).
Other interesting findings included:
Policyholders were 4% less likely to claim in 2018 than in 2013
The average length of time for person being on claim increased by 36% in 2018 compared to 2013
Accident claims paid in 2018 were 23% higher than the equivalent in 2013
Musculoskeletal claims paid in 2018 were 7% higher than in 2013
Claims paid due to mental health in 2018 were 53% higher than in 2013 with a 125% increase in the incidence of claims amongst men due to mental health.
Claims paid due to cancer in 2018 were 31% higher than in 2013
The research also found that occupation, smoking status and age are key factors in people making claims:
A 45-year-old male blue collar worker is approximately 4.5 times more likely to make a claim than his white-collar counterpart.
A 45-year-old male smoker is 31% more likely to make a claim than his non-smoking counterpart
A 60-year-old male non-smoker is 27% more likely to make a claim than a 45-year-old.
For most causes of claim, the average claimant is back at work within 12 months.
However, the average for claims due to cancer was 14 months and for mental health disorders, 18 months, to return to health and the workplace.
The research also found that the longer a person is off work, the less likely they are to return to work. On average, only 5% of people who had been on a claim for five years or more were expected to return to work within the following year.
KPMG Actuarial Partner, Briallen Cummings, said the study had shown a significant rise in pay-outs in all categories of claims over the past five years but the increase in mental health claims was especially notable.
“Total claims benefits for mental health conditions have more than doubled in the past five years,” she said.
“Mental health claims tend to take longer to be reported and assessed than other cause of claims, but the pay-out rate by insurers is high and reflects the importance to our community in supporting these individuals in a return to health and work,” Ms Cummings said.
The times, they are a-changin'...
...so now is the time to lock in the best possible protection before the opportunity is gone
Bob Dylan may have written and released The Times They Are a-Changin' some 56 years ago but, as we’ve been reporting for the past 18 months, that message is amply appropriate for the changes sweeping the life insurance market here in Australia. What we’d like to do in this story is provide some context and background that together – we believe – indicates further significant change to come. Over the past few years, life insurers in Australia have been paying out record levels in claims (as illustrated in the accompanying story in this newsletter titled - KPMG/FSC Study Reveals Large Rise in Life Insurance Claims Payouts). The dramatic increase in funds being paid to successful claimants has led to significant impact on insurers. APRA’s Quarterly life insurance performance highlights statistics to March 2020 (released 28 May 2020) illustrates this and also how the COVID-19 pandemic has exacerbated this. Again, it is important to note that the fundamental reason insurers are in the economic position they are is because they have been paying out on the vast majority of claims. Therefore, anyone taking out insurance as a means of managing financial risk, should be reassured to know that well over 80% of eligible death, total and permanent disability and income protection insurance claims are paid, especially if an adviser assisted them in buying the policy. Last year, we reported APRA’s intervention in the income protection insurance market to force insurers to improve the economic sustainability of their companies and products, which has already seen the cessation of availability of Agreed Value Income Protection (IP) products. This same intervention, with effect from 1 July 2021, will limit policy contract terms to five years. So, while a policyholder may have a policy offering benefits payable until the successful claimant turns 65-years-of-age, the term of the contract itself will only be five years ‒ renewable every five years. In the wake of the COVID-19 pandemic, a number of industry commentators and media have flagged significant increases in the number of mental health-related life insurance claims.
During the Financial Services Council’s Life Insurance Summit 2020, Senator Jane Hume floated the idea of replacing total permanent disability insurance (TPD) lump sum payments with paid treatment plans. Senator Hume is reported as describing mental health as a "looming crisis" for the life insurance industry and also saying the Federal Government is alert to the issues and "open-minded" about ideas for reform. And here are a couple of other factors to consider:
commentary from a range of life insurance company CEO’s in Mike Taylor of Money Management’s recent excellent piece; LIF, life and tough times for insurers,
APRA’s late July “Letter to all insurers: Capital management” providing further guidance on capital management to insurers.
When you consider all of the factors outlined above, it becomes clear to us that further significant change is coming to the life insurance market. While a number of the CEO’s quoted in Mike Taylor’s piece say they are looking for alternatives other than simply increasing premiums, we believe annual increases in premiums are here to stay for the foreseeable future. Again, it is important to note that increased premiums are not about hiking profits. They are about economic sustainability at a time when the regulator is pushing insurers to be more economically conservative. Accordingly, it would be fair to say many insurance products have been under-priced historically and the market is now going through a correction.
We also believe that insurers will likely become less generous – or should we say “more conservative” - in their product offerings to minimise the amounts they are required to pay out when honouring claims. In this context, it only makes sense to ensure you review your current financial risk management plan as soon as possible to ensure you have the most appropriate and best possible terms locked in place now – before the market changes.