This month we continue our focus on the upcoming Australian Prudential Regulatory Authority’s (APRA) proposed changes to Income Protection insurance products. Recently we had the opportunity to hear an analysis of these proposed changes presented by Metlife’s Head of Advice Strategy, Dr Jeffrey Scott. What made this analysis particularly interesting was that Dr Scott not only addressed the regulatory body’s intent behind each of the changes but also the unintended consequences of each new regulation. Dr Scott’s analysis concurs with the issues we raised in last month’s Referral Partner newsletter. Namely, product inclusions and benefits are likely to “become a race to the bottom” and premiums are likely to increase. But Dr Scott also focusses in more detail on the additional administrative burden the APRA changes will bring, meaning a higher cost to serve, additional client management complexity and paperwork along with one APRA proposal which is actually in contravention of the Life Insurance Act 1995 as it currently stands. This month we will focus on Dr Scott’s analysis of several of the changes proposed to come into force on 1 July 2021.*
APRA proposal: Benefits will be based upon the life insured’s income over the preceding 12 months.
The intent of the proposal:
To ensure that the monthly income protection benefit paid is linked to the actual income being earned at time of claim.
To encourage the life insured to return to work sooner.
Unintended consequences:
This calculation has the ability to significantly reduce benefit payments when an individual is at their most financially vulnerable.
Vulnerable individuals include those:
Working in the gig economy,
Recently returned to work after looking after children, [AFRM comment: If a claim manifests while you are returning to full working/earning capacity then a lower benefit could be the result, even if the intention is to return to full capacity in the future. A common scenario for young families includes an extended period of part-time work for the primary carer during the early years of raising children.]
Who have been out of the workforce for a few months (retrenchment or redundancy), [AFRM comment: This is particularly important for those in corporate roles or people working in sectors that see seasonal or contract roles.]
Self-employed path to disablement. [AFRM comment: From experience, we know that self-employed people will typically battle through personal health issues in an effort to maintain their business. This tends to lead to a gradual decrease in income prior to claim.]
APRA proposal: Policy term of the contract shall not exceed five years.
The intent of the proposal:
To limit benefits that are no longer relevant based upon current social norms and medical advancements.
To create products that will remain sustainable and appropriate consumers.
To keep products in step with changing external and consumer circumstances and moderate the extent of premium increases that may otherwise be needed.
Unintended consequences:
This proposal removes certainty for the client. [AFRM comment: This reduces certainty for clients who may have had particular benefits or features on their original policy, but have those benefits or options reduced or eliminated on their policy they reapply for after five years.]
As the income protection policy will not be automatically renewed after five years, if the client forgets to reapply for the policy they may be left without any cover. [AFRM comment: Of course, if your clients are with AFRM, our proactive annual review process will ensure your clients cannot forget.]
APRA proposal: After the initial five years, the policy may be renewed without medical underwriting, but both income and occupation will need to be reviewed and confirmed.
The intent of the proposal:
To ensure the benefits and features are appropriately priced based upon the risks associated with the individual. However, individuals rarely have the same job for their entire careers (as was the case when income protection was originally invented), with most people having at least eight different roles throughout their working career.
Unintended consequences:
Increased administrative burden on advisers and clients.
Clients may be unable to obtain cover if their occupation is no longer insurable.
Insurance company may have ceased to offer an “on sale” product.
Increased administration costs for life insurance companies may be reflected in increased premiums.
APRA proposal: After the initial five years, the terms and conditions issued on the new policy must be based on the policy on issue at the time of renewal.
The intent of the proposal:
To limit benefits that are no longer relevant based upon current social norms and medical advancements.
Permits life insurance companies to remove or modify features and benefits under the policy (currently prohibited under Life Insurance Act 1995). [AFRM comment: Permits life insurance companies to remove or modify features and benefits under the policy. Doing so is currently prohibited under Life Insurance Act 1995.]
Unintended consequences:
This may result in a race to the bottom in relation to income protection product design.
Benefit design may progressively be minimised to reduce costs and eliminate benefits.
This reduces certainty for clients who may have had particular benefits or features on their original policy, but have those benefits or options reduced or eliminated on their policy they reapply for after five years.
APRA proposal: Longer benefit periods must have more stringent disability definitions.
The intent of the proposal:
To encourage individuals to either retrain to another occupation or to undertake rehabilitation to return to their previous role. By making the disability definition more restrictive after a defined period of time, it is intended to reduce the moral hazard and encourage individuals to return to work.
Unintended consequences:
Reduced protections for clients compared to current environment.
The definition of “totally disabled” could be modified from an “own occupation” definition at time of claim, to an “any occupation” definition if the life insured has been on claim for a defined period of time (possibly two years based upon previous legislation and product design).
Sudden elimination of benefits because the rules change regarding the definition of disability.
This could have a significant financial impact on the customer.
[AFRM comment: Dr Scott and AFRM believe this will make TPD an even more critical component of a financial protection portfolio.]
Dr Scott summarised his analysis by declaring that APRA’s changes to Income Protection insurance “will reduce or eliminate benefits on new Retail Income Protection policies.”
He also said he is not alone among stakeholders in the industry seeking clarity from APRA around how some of the unintended consequences and the conflict with existing legislation should be interpreted.
At AFRM, we believe his findings validate assertions made in our last Referral Partner newsletter and raise further issues to consider while we await clarification from the regulators.
The need to review and confirm both income and occupation for each client with an Income Protection policy every five years will certainly increase the administrative burden on advisers and clients alike, while some clients may discover their occupation is no longer insurable, or the policy product they hold may be deemed no longer an “on sale” product and/or increased administration costs for life insurance companies may be reflected in increased premiums.
Come what may, what remains certain is that as we move into these uncertain times it will become increasingly important to rely on the expertise and advice of specialist financial risk management advisers ‒ specialists who have the ear of insurance company senior executives.
And once again, it underscores the need to ensure our clients review their current financial risk management plans to ensure they have the best possible terms locked in place before the market changes.
Sincerely, Rob Vitnell Acting Managing Director AFRM * [Note: Subsequent to Dr Scott's presentation, on 30 September 2020, APRA released its Final individual disability income insurance sustainability measures, in a letter to insurers which included a delay to the implementation of several of the measures detailed above to 1 October 2021. This includes the requirement that the income at risk for new Income Protection contracts should be based on annual earnings at the time of the claim event, not older than 12 months. We will look at the implications of the other measures announced on 30 September next month.]
Case Study
“It’s tragic to see a person’s life turned upside down by such a freak accident and subsequent series of unfortunate events.”
“I can’t imagine how much worse off he would be now if he didn’t have the AFRM financial risk management plan in place at the time of his accident.”
This case study is about a how your life can change dramatically thanks to one chance, freak, accident.
How the damage done in a freak accident can be compounded dramatically if medical practitioners don’t accurately diagnose a serious injury the first time the patient presents.
It also underscores the importance of having a risk management strategy in place, so that it is there to support you when you need it most.
Finally, it demonstrates how the support provided by AFRM can help ease the stress and anxiety that arises for most people on long-term claim, having to file all the appropriate medical reports and other paperwork each month to continue to receive benefits.
On 22 April 2017, self-employed contractor mechanic, Mark [name changed to protect client privacy], was walking his dog on a leash when the dog suddenly went after a cat and Mark pulled back hard on the leash to restrain it.
Mark felt something pop in his arm at the time and the pain told him he had possibly hurt himself badly.
He drove himself to his small local hospital, where he was seen by the after-hours GP Access service.
The duty physician did not diagnose any serious injury and sent Mark home with the direction to seek medical advice if he wasn’t feeling any better in the few days.
Four days later, on 26 April 2017, convinced he wasn’t imagining his pain and discomfort, Mark presented himself to the largest hospital in the region to seek a second opinion.
A complete rupture in the tendon attaching his right bicep to the bone just above the elbow was diagnosed and he was immediately admitted to the hospital for treatment.
Significant concern was raised by the treating physicians because the chances of successfully reattaching a tendon to bone (and minimising long-term symptoms) are infinitely better in the first 24-48 hours than they are days after the incident.
On 28 April 2017, he was transferred to a small private hospital for specialist surgery to re-attach his bicep and tendon to the bone in his arm. The next day he was discharged with orders not to remove his sling for one month.
This was when Mark’s fortune began to really unravel. As a contracted, sole-trader, mechanic, Mark had no access to sick leave. So, even though he had literally ripped the bicep off his upper arm bone on 22 April, he turned up for work on 24 and 25 April. This is a fitter and mechanic’s job working on heavy machinery with a lot of heavy lifting involved.
Then, as noted above, he was in hospital 26-29 April.
And despite his surgeon’s advice, Mark went to work from 1-17 May, doing the best he could with limited use of his right arm. On 18 May 2017, his contract was terminated for “economic reasons.” He had been in the role 18 months.
In early July 2017, thanks to AFRM’s assistance, Mark’s insurer formally advised that his claim for Total Disability under his Income Protection insurance policy was approved to the value of between $8,000 and $9,000 per month.
He was required to submit reports with updates from his medical practitioners monthly in order to continue to receive benefits.
Initially, his specialist surgeon forecast Mark would be unable to work anywhere from three to 12 months because the injury had caused nerve damage within his arm. Over the coming months, his specialist provided Mark with a range of drugs seeking to mitigate his pain.
By September that same year he was also seeing a pain specialist who added several new medications to those Mark was already taking. It was suspected but not proven that the nerve damage was incurred during the surgery to re-attach his distal biceps tendon.
Mark was now in a monthly cycle of unsuccessful medical treatments and reporting updates to his insurer in order to keep receiving his benefit. AFRM supported him throughout this time, submitting his monthly reports to his insurer and liaising with the insurer on Mark’s behalf as required
By January 2018, his specialist reported that his right hand continued to be non-functional and that his condition was deteriorating with increased pain in his right hand and forearm.
By January 2019, Mark was having daily physiotherapy but faring no better. He was still experiencing significant pain in his right shoulder, bicep, forearm and hand; and had reduced strength and arm control.
Fortunately, despite not being able to work, the insurance protection put in place by AFRM provided Mark with replacement income in excess of $100,000 for the 2019 financial year.
By the end of December 2019, the insurer requested Mark attend an appointment with an Occupational Physician, appointed by the insurer, to undertake an Independent Medical Assessment of his condition.
By March 2020, AFRM followed up the insurer seeking to know the outcome of that appointment because uncertainty caused by the lack of communication by the insurer was taking a psychological toll on Mark.
Mark remains on claim to this day and continues to be supported by AFRM.
His AFRM advisor, Phil Hatherly, is hopeful that the insurer will ultimately accept that Mark is totally and permanently disabled and will formally recognise him as a long-term claimant, in order to reduce the ongoing mental health issues and stress caused by having to chase up his treating physicians to complete monthly reports for the insurer.
“At the end of the day it is just an awful situation to be in. He’s in pain constantly, is suffering depression as a result, and has lost his career. All because his dog tried to chase a cat,” Phil said.
“It’s tragic to see a person’s life turned upside down by such a freak accident and subsequent series of unfortunate events.”
“I can’t imagine how much worse off he would be now if he didn’t have the AFRM financial risk management plan in place at the time of his accident.”
AFRM Acting Managing Director, Rob Vitnell, added that in AFRM’s experience, many clients (irrespective of their occupation) do ultimately suffer ongoing secondary health issues, as Mark unfortunately has in this case.
“Often clients say that because they have a desk job, they only need their brain to work. That is, if they suffered an injury or illness they could still work,” Rob said.
“Mark’s case highlights how an initial injury or illness can lead to a cascading series of other physical and mental health issues over time.”
“When advising clients sometimes it is difficult to get them to truly understand the potential seriousness of the issues that can arise unless you highlight cases such as Mark’s.”
“The fact that Mark suffered ongoing issues, in particular nerve damage, severe and ongoing pain, plus the development of significant mental health issues given the overall impact of the circumstances on his life, clearly demonstrates the domino effect that can occur.”