Over the last 5 years the income protection market in Australia has been reeling on the back of very generous products, aggressive underpricing as well as skyrocketing claims. It has created a perfect storm with no end in sight. Over the five year period through to December 2019 the industry lost around $3.4 billion dollars with losses of almost $1.5 billion in 2019 alone. It is an issue that has resulted in significant concern given how vital a robust, and therefore profitable, income protection market is to society in Australia.
Without a light at the end of the tunnel, the regulator, APRA, has been forced to intervene. APRA has come forward with sweeping reforms to be implemented in the income protection market in Australia. Although these changes will hopefully bring about a more sustainable and profitable industry, they may pose considerable risks to those that do not presently hold one of the policies that are available today. The first raft of reforms went through in April 2020 with the final reforms to be applied from October this year. The changes that are coming in October 2021 are far more substantive than what we have seen before.
It is important to understand that these changes are subject to the relevant product and compliance teams at product providers. I have spoken with various insurers to understand their interpretation of APRA’s guidance in conjunction with my own.
The changes that are likely coming can be summarised as follows:
- The maximum amount of time you can be on claim may be reduced to age 65 as opposed to age 70.
- When an insurer assesses your income at the time of claim to verify you are eligible to receive your level of cover, they will only look at your last 12 months of income. Currently they will look at your best 12 months in the 3 years leading up to your claim which provides greater flexibility in the event of temporary drop in your income. For example, if you had time between jobs where you earn no income in the year leading up to your claim, you may not be eligible for your full benefit. This guidance does have an exception relating to those who have variable incomes in still being able to access the previous definition of your best 12 months over the past 3 years.
- Contract terms are limited to 5 years. Every 5 years the insurer will now require you to verify your income, your occupation as well as your hazardous hobbies/past times (e.g football, diving etc). Currently insurers can only capture this information at the time of application and the insurer has no recourse should your risk to them increase.
- You will be able to replace less of your income while on claim. Currently you can replace 75% of your income inclusive of the super guarantee you receive. It is anticipated that you will only be able to replace 70% of your income while not being able to insure your super guarantee in your own name.
- For long term claims, it is likely the criteria to qualify for a claim will change once you have been on claim for 2 years. Income protection will currently assess your claim on your ability to work in your ‘Own Occupation’ for the entirety of your claim, through to policy expiry. ‘Own Occupation’ refers to the specific role you are in at the time of disability. From October, insurers will likely be required to mitigate the risk of long term claims by assessing your ability to work against your ability to perform ‘Any Occupation’ you are suited to by way of education, training and experience. This measure is intended to reduce the burden of long term claims by forcing claimants to return to work in a different occupation that they are suited to should they be capable.
It is important to note that the product design has not been finalised for the changes that are coming, the above is how we have interpreted APRA’s direction in conjunction with the opinions of various insurers.
This blog post is not intended to tell you whether or not you do or don’t need income protection insurance, it is intended to highlight the changes that will be coming and to help you determine whether it is worth your while. It is an unfortunate reality that these existing policies are likely to increase in cost, even if you already have one in place, as they are unsustainably generous and insurers will need to find a way to recoup their losses. There is no perfect solution, as there is significant uncertainty in the income protection market. We are here to guide you through this process.
If you would like to read APRA’s official correspondence on the matter and the source material for this post, please click here.
General Advice Disclaimer
General advice warning: The advice provided is general advice only and in preparing it we did not take into account your investment objectives, financial situation or particular needs. Before making an investment decision on the basis of this advice, you should consider how appropriate the advice is to your particular investment needs, and objectives. You should also consider the relevant Product Disclosure Statement before making any decision relating to a financial product.