Unfortunately, we write this article all too often, advising clients that life insurance premium increases are once again on the horizon.
When we think of Life Insurance companies, we generally assume they are raking in massive profits at our expense. The situation is very different.
Life insurance is currently an industry that is struggling with profitability and indeed making huge losses when referencing income protection policies.
In a recent Australian Prudential Regulation Authority (APRA) report for the 12 months to September 2019, risk products reported a combined after-tax loss of $417 million, a significant reduction from the $654 million profit for the previous 12 months. Individual lump sum remained largely the same pre-tax, while all other risk products deteriorated, particularly Income Protection. The table below highlights these heavy losses by risk product.
Table 1 – Risk product net profit after tax for the life insurance industry in the year ended 30 September:
|September 2018||September 2019||Sep 2019 quarter only|
Individual lump sum
|751.7 million||866.8 million||238.0 million|
Individual disability income insurance
|-276.7 million||-1,119.1 million||-231.3 million|
Group lump sum
|106.4 million||8.1 million||-45.5 million|
Group disability income insurance
|72.9 million||-173.1 million||-66.6 million|
APRA has decided to impose an upfront capital requirement on all individual disability insurance providers, effective from 31 March 2020. The capital requirement will remain in place until individual insurers can demonstrate they have taken adequate and timely steps to address APRA’s sustainability concerns. In instances where individual insurers continue to fail to meet APRA’s expectations, APRA may also issue directions or make changes to licence conditions.
To add weight to the Life Insurance industry woes, a recent analysis by KMPG, titled Life Insurance Insights 2019 identified some of the issues that the sector is currently facing, including:
- Income protection benefit payments (claims) increased in 2018 by $1.2 billion. 62.9% of premiums were paid as benefits in the first half of 2019. This is up from 59.3% last year.
- Mental Health claims are now the main contributor for TPD claims.
- Mental Health claims are now the second main cause of Income Protection claims. There is a noticeable trend that once a client is on claim for this condition, they rarely come off claim or return to work in the short term.
- Revenue growth for life insurers has subdued as distribution has now been hindered due to Royal Commission recommendations. Changes to adviser remuneration has resulted in upfront commissions being reduced by half, with many advisers now choosing to leave the industry.
Lump sum policies continue to be profitable for insurers with $532 million profits in the first half of 2019. However, disability policies continue to be unprofitable with $568 million losses in the first half of 2019. KPMG points to multiple challenges related to product design, demographic trends, regulations and changing community expectations.
The industry currently remains well capitalised. For the financial years ended in the 12 months to December 2018, capital coverage ratio for the industry decreased slightly from 2.1 to 1.8.
Clearly with the industry facing such issues, it is important to understand ultimately why all insurers will be continuing to increase premiums.
APRA expects life companies to better manage the features inside these current policies, which are very generous at point of claim,
- ensuring income protection benefits do not exceed the policyholder’s income at the time of claim, and ceasing the sale of Agreed Value policies;
- avoiding offering income protection policies with fixed terms and conditions of more than five years;
- ensuring effective controls are in place to manage the risks associated with longer benefit periods.
What this means for many policy holders is that your current policy will most likely be stronger in terms of benefits and conditions than the policies that are likely to be offered by insurers moving forward.
Strategies to consider for maintaining your cover
Typically, the main strategy that exists to reduce your premiums is to look at reducing the risk to the insurer. Moving insurers generally means that you will need to provide new disclosure, and this may mean obtaining a newer policy with loadings or exclusions if your health has changed since owning the original policy.
At FB Wealth Management, we continue to recommend Income Protection insurance to our clients and constantly have claims amongst a very small client base. Maintaining personal insurances is still an essential protection tool, in our opinion, when building wealth. Hopefully you will never need to claim, though it is there to safeguard you and your family should the need arise.
Whilst we acknowledge that premiums are increasing for disability insurance, we still see it as an essential policy in a client’s portfolio. As we have mentioned previously, changing insurers is rarely the right outcome. Longevity with an insurer counts at time of claim.
Levers that can be pulled to address premiums or could be at least considered:
- Investigate the reduction in premiums by extending your waiting period.
- Investigate a smaller sum insured (whilst not ideal, it may be an effective way of maintaining a policy longer).
- Can you reduce your coverage due to your improved asset and liability position?
- Benefit periods are typically to age 65. It is possible to have a smaller benefit period of 5 years for example. Not ideal, but once again a better option than cancelling a policy all together.
- Possibly decline the CPI that is offered each year on your sums insured to ease the pending premium increases.
As advisers, we personally hold the same policies that we recommend to our clients. We share your frustration at these constant premium increases. We have no doubt that new disability policies will be issued by providers in the coming years. These policies will not have the same auxiliary benefits that have been built into products in the past decade, driven by strong bank competition. Not having a crystal ball, we cannot advise what this timeframe looks like, but our advice for now is to hold tight where possible. These policies do pay, and profoundly affect lives, as the statistics demonstrate.
* APRA releases life insurance statistics for September 2019
* KPMG Life Insurance Insights 2019