This month we will again focus on the Australian Prudential Regulatory Authority’s (APRA) ongoing implementation of measures to force insurers to be more conservative in their Income Protection (IP) product offerings.
As we reported in our Q1 2021 Client newsletter, APRA’s final changes to regulations dictating how future IP products 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 have any clients that you feel may not have the best possible IP solution in place, now is the time to have their cover reviewed by AFRM before IP contracts become more restrictive.
This view was also expressed by TAL’s Regional Manager – NSW/ACT, Ed Bassingthwaighte, during a recent presentation to the entire AFRM Team during a company retreat in Newcastle.
Ed summarised APRA’s new IP product boundaries that will come into effect from 1 October 2021, as follows:
Income at Risk
APRA expects that income at risk for all new IP contracts be based on annual earnings at the time of claim, not older than 12 months for those with stable incomes and an average over a longer period for those with variable incomes.
Income Replacement Ratio
APRA expects insurance benefits do not exceed 90 per cent of earnings at time of claim for the first six months of the claim, taking account of all benefits paid under the IP product, as well as other sources of earned income.
After the initial six months, insurance benefits are limited to 70 per cent of earnings at time of claim.
Superannuation contributions may be covered in addition to these limits, payable directly to the fund and not as cash to the insured. With replacement ratios declining, new products will simply pay less at claim time compared to those currently available.
Benefit Period
APRA expects life insurance companies to have effective controls in place to manage the risk associated with long benefit periods AND to set internal benchmarks for new IP products with long-term benefit periods which reflect the risk appetite and effectiveness of the controls.
For example, a change in benefit amount or disability definitions over the course of time. This means more restrictive cover / less claims proceeds paid to claimants over the life of policies, compared with existing products.
Policy Contract Term
APRA expects that life companies will only offer IP contracts where:
The initial contract is for a term not exceeding five years; and
There is a right for the policy owner to elect to renew the contract for further periods (not exceeding 5 years) without a medical review on the terms and conditions applicable to new contracts that are then on offer by the life company.
Changes to occupation, financial circumstances and dangerous pastimes should be considered on renewal. This means additional administration of client policies to renew every five years – additional time and effort for the client and the adviser compared with current products which automatically renew each year.
Mr Bassingthwaighte noted that all of these changes are intended to be ‘boundaries’ within which life insurers are expected to operate and that APRA has advised these requirements do not represent the entirety of product terms that adversely impact sustainability.
He said insurers are expected to make product changes more broadly to improve sustainability.
Mr Bassingthwaighte also noted that the new five-year Policy Contract Term means policies are no longer guaranteed renewable but that ‘to age 65’ coverage will still be available.
In AFRM’s view, what all of this means is that it would be prudent for us to request all of our respected Referral Partners to consider the potential impacts of these IP changes on your clients. Some clients may benefit from the new products available (from a cost perspective).
However, for some clients it may be more prudent to purchase current generation products for the level of protection they will afford (compared to the proposed new products).
We believe it would be wise to advise all clients of the changes to come and ideally seek to review all existing clients and look for opportunities to obtain the best possible IP coverage before the changes come into effect.
While 1 October may seem some time away, the time to act is now.
With advisers across the industry doing the same thing for their clients, it would be wise to allow as much time as possible for new applications to be completed, submitted, and considered. Best not to leave your run too late with putting the right solutions in place.
What we know for sure right now, is that post 1 October 2021, IP products will not be as generous and comprehensive as they are today. They will still offer the necessary protection that we all need, however some of the key features and benefits of these products will be removed.
Despite the changes in IP products to come, there have been some good developments in these products recently that you and your clients may not be aware of. We, at AFRM, would like to make sure that you are aware of these and that we make the necessary changes before it is too late.
The team at AFRM stands ready to provide your clients with the best advice possible during this time of change.
Simply reach out and we’d be delighted to work through this issue with you and your clients, to discuss your options and, if appropriate, to complete the necessary reviews.
Sincerely,
Rob Vitnell
Managing Director AFRM
Case Study:
With this story we demonstrate that AFRM will not settle for the first response from an insurer and will work to get the best possible cover and premiums to meet its clients’ needs.
It demonstrates our knowledge of the market means we can negotiate the best possible terms for our clients.
It demonstrates the value of seeking advice and getting the right insurance plan in place.
We often talk about how our expertise in financial risk management and knowledge of insurance products enables us to achieve outcomes that our clients (and many in our industry) may not be able to achieve on their own.
This story provides a number of examples that, we hope, validates that claim.
Mia [named changed to protect client privacy] is a successful single professional in her mid-50s who was referred to AFRM a number of years ago with a view to expanding the level of her insurance cover.
At that time, Mia only had life insurance through her two separate superannuation funds. Each superannuation fund was paying monthly premiums on her behalf for Income Protection (IP), Term Life and Total and Permanent Disability (TPD).
Being a single person, Mia was more focused on having adequate IP and TPD cover to financially support her through an illness or disability, rather than coverage in the event of her death.
She also wanted to minimise the impact of premiums on her personal cash flow.
AFRM Managing Director, Rob Vitnell, was Mia’s adviser and developed strategic recommendations in line with Mia’s directions which ultimately provided a financial risk management plan offering IP benefits in excess of $10,000 per month and a range of ancillary benefits should Mia ever be unable to work due to illness.
The risk management plan also delivered TPD cover of a million dollars and recommended ‘split’ style policies which allowed Mia to fund the majority of her premiums via superannuation.
The first hurdle AFRM was able to surmount for Mia was that the initial proposed supplier of her IP insurance wanted to apply a 50 per cent loading to the premium quoted because of a genetic condition her biological mother had died of relatively early in her life.
This proposition would have taken the annual premium to in excess of $10,000, a sum Mia understandably believed to be unreasonable.
Accordingly, AFRM sourced an alternative provider who was willing to provide the same level of cover without any loading on the premium which met the approval of Mia and her financial advisers (AFRM’s referral partner).
After establishing the new policies, AFRM also liaised with the relevant superannuation funds to cancel the pre-existing policies in her superannuation that were replaced by the new.
That’s where some months later AFRM again stepped in to assist Mia obtain refunds from one of the superannuation funds when it became evident that it had continued to debit premium amounts for a period of nine months despite the insurance being cancelled!
AFRM contacted the relevant superannuation fund and provided evidence of the sums being deducted and persuaded the superannuation fund trustees to initiate an investigation into why the funds had continued to be debited from Mia’s account. AFRM was given an assurance that a full refund would be expedited as soon as possible.
Following implementation of the changes recommended by AFRM, Mia had a total of four policies with premiums funded in part by two separate superannuation funds:
Income Protection as Superannuation (Agreed Value) with a benefit of $10,000+ per month, 90 days wait, to age 65
Income Protection Plus (Agreed Value) with a benefit of $10,000+ per month, 90 days wait, to age 65
Accelerated Protection Superlink Total and Permanent Disability TPD (Own Occupation TPD) with a benefit of more than $1m
Accelerated Protection Total and Permanent Disability (Any Occupation TPD) with a benefit of more than $1m.
Several months later (mid-October 2019) Mia’s financial adviser contacted AFRM and asked us to touch base with Mia. AFRM’s, Bruno Muraca, contacted Mia and was told that she had been diagnosed with bowel cancer; she had only a few days’ worth of sick leave owing; that she was doing a work handover with her boss, was scheduled a preliminary medical procedure in just a few days; and wondered what she should do about initiating a claim?
Bruno assured Mia she only need focus on her recovery and that AFRM would take care of everything required to submit the relevant claims. It was agreed that AFRM would loop in the woman Mia now looked upon as her mother, Claire, on all future communication while Mia was undergoing medical treatments.
The prospect of upcoming surgery for Mia and a potentially extended rehabilitation period prompted Claire to ask AFRM about the potential financial impact Mia’s illness may have on Claire herself, for example, if Claire found herself needing to financially support Mia for an extended period of time.
AFRM checked Claire’s level of cover and was able to provide reassurance that she had adequate cover for the circumstances. Knowing that both Mia’s and her own financial interests were protected provided Claire with peace of mind during a difficult time.
Meanwhile, upon first hearing of Mia’s diagnosis, Bruno had immediately contacted the insurer that held Mia’s Income Protection policy to test the waters on applying for the “Crisis Benefit” payable under that policy. The “Crisis Benefit” pays a monthly benefit for six months if the Insured Person suffers a specified crisis event, whether or not they are able to return to work.
Swiftly compiling and filing all of the relevant claim documentation, AFRM was able to secure Mia a Crisis Benefit payment of $62,000 by the second week of November – in less than a month.
While that claim was being processed, Mia had been scheduled for surgery in late October.
However, on the day she suffered an anaphylactic reaction to the anaesthetic, resulting in a brief stint in the Intensive Care Unit, a total of three days’ stay in hospital and a delay to the surgery of 10 days to allow her body to recover.
AFRM recognised that the stay in hospital meant Mia also qualified for the “Bed Confinement Benefit” included in her Income Protection policy and immediately commenced that claim on her behalf.
The Bed Confinement Benefit pays a benefit if the Insured Person is confined to bed for more than three consecutive days during the waiting period. Mia’s first stint in hospital was one day, then there was another couple of days when the surgery was rescheduled.
After initially being told the benefit would not be payable, AFRM successfully argued for the entire period Mia spent in hospital to be included in the benefit payment and again compiled all of the relevant documentation and medical reports to support that claim through to a successful conclusion.
Mia remains an AFRM client to this day and Bruno was true to his word in identifying all relevant claims and managing them through to a successful outcome so that Mia could focus on getting well. Mia is now cancer free and has returned to work full-time and recognises the value her insurance played in her life when she was ill.
With this story we demonstrate that AFRM will not settle for the first response from an insurer and will work to get the best possible cover and premiums to meet its clients’ needs.
It demonstrates our knowledge of the market means we can negotiate the best possible terms for our clients.
It demonstrates the value of seeking advice and getting the right insurance plan in place.
To illustrate, in a hypothetical scenario where Mia did not ever seek AFRM’s advice, the claim outcome would have resulted in a total benefit payment from her original Superannuation cover of less than $10,000.
This would have been all she could rely on financially to see her through the six months it took to return to full-time work.
If that potential future had of occurred, it would have manifested Claire’s very real fear of needing to support Mia financially while she recovered.
This story also demonstrates how AFRM will proactively work with insurers – and superannuation funds – to ensure routine administration and billings are managed appropriately. Where a discrepancy is brought to our attention – or when we identify it ourselves – we will act to ensure the best interests of our clients are protected. In this case, securing a refund of nine months’ worth of premiums debited from Mia’s superannuation account AFTER the relevant policy had been cancelled.
And finally, this case demonstrates that if our clients ever need to make a claim, we will be there to support them when they need us most. Proactively identifying valid claims and working to get them paid as soon as possible to ensure the best possible health and financial outcomes.