Income Protection problems

As so many of you are already aware, income protection premiums have risen significantly in recent years.

The number and longevity of claims has been swollen by issues related to stress and mental health, with payments exceeding premiums collected. In fact, over the five years to December 2019, the body which oversees insurance companies estimates the industry incurred losses on income protection alone of $3.4 billion!

This situation became so concerning that APRA implemented changes to make the industry sustainable. These changes will reduce risk to the insurer. The corollary is that it will reduce benefits to clients, in particular, to new clients or existing clients contemplating changes to existing arrangements.

From our viewpoint, the most significant detrimental change is the inability to now offer “agreed value” contracts. Previously, once we could prove our client’s income at time of underwriting, the sum insured was payable in the event of a successful claim. This has now been changed to indemnity insurance, where the amount payable is limited, depending on income proven at the time preceding a claim.

In the case of business clients, where income can be up and down, this creates an element of risk that was not there before. However, no alternative is now permitted.

Income protection is therefore more expensive, for lower quality cover. It is still a vital component of a risk portfolio, but existing clients must give deep consideration before making any changes that could bring them inside the new regime.