APRA forcing insurers to change their income protection offering

The Australian Prudential Regulation Authority (APRA) has launched an intervention into the life insurance market in response to ongoing heavy losses in respect of individual disability income insurance (DII).

APRA has announced a series of measures, including capital charges, that will require life insurers and friendly societies to address flaws in product design and pricing that are contributing to unsustainable practices.

Life companies have collectively lost around $3.4 billion over the past five years through the sale of DII to individuals (rather than through superannuation). APRA wrote to the industry in May 2019 requesting urgent action to address the problems. Since then, insurers have reported further losses of $1 billion, prompting APRA to escalate its response!

It is believed that in an attempt to buy market share, insurers designed excessively generous products which in some cases provide a financial disincentive for policyholders to return to work.

It is currently rumoured that by 1 April 2020, insurers will no longer be able to offer Agreed Value income protection policies. We see this as a great danger to many individuals, especially those who are self-employed.

Agreed value policies allow clients to prove income at time of application. Regardless of their current earnings at time of claim, they will be paid their agreed sum insured. However, APRA are pushing for insurers to only offer “indemnity” products moving forward which will see insurers assess a clients income for the 12 months prior to the claim. This can be an issue for some business owners who may be having a poor financial year either due to market conditions or something as innocent as a bad debt they need to absorb. If they were to have a claim in that particular year they will only be paid 75% of their actual profit in that year.

Those clients that already have an agreed value policy will be safe from these changes as long as they continue to pay their premiums. We have no doubt that these premiums will become more expensive. However, new individuals seeking income protection insurance from April 1, 2020 may be forced into very vanilla products in an attempt to return these companies to profitability in this product class. On the flip side though, these products may be cheaper due to offering far less benefits.