The Australian Prudential Regulation Authority (APRA) on Monday announced a number of measures to force life insurers to address issues with the design and pricing of income protection insurance (IP), due to the product’s deteriorating profitability.
The industry recorded further losses of $1 billion on IP in the nine months to 30 September 2019, pushing total losses over the past five years to $3.4 billion. As a result of these losses, the Government is concerned about the long term sustainability of IP and also that, if these losses aren’t addressed, it may lead to some insurers leaving the Australian market completely. As a result, APRA has decided to make one of the biggest changes to IP in the history of the product, namely;
- Effective 31 March 2020, life companies should cease writing IP contracts where benefits are not based on income at the time of claim, particularly Agreed Value contracts.
From 1 July 2021, APRA expects that income at risk for all new IP contracts will be based on annual earnings at the time of claim (not earnings at policy application), not older than 12 months.
We cannot understate the how wide-ranging the impact of these changes will be for anyone taking out a policy after 31st March, 2020!!!
We recommend all of our clients to set their cover on an Agreed Value basis which means that your sum insured is based upon your income at the time of application. This protects the client in two ways;
- If the clients income drops in the future (starting a new practice, extended travel, maternity leave etc), the sum insured would still be paid.
- If the clients builds or buys a larger practice that would still continue to trade profitably, an Agreed Value policy will not apply any “profit offset” clauses that will reduce the sum insured by the amount of net profit the practice continues to generate.
Both of these benefits will be lost forever from the 31st of March 2020!
Any policy that is in force prior to the 31st of March, 2020 will not be affected by these changes, so now is the time to review your cover to make sure it suits your needs and whatever happens, do NOT let your cover lapse in the future as you just will not have the option to take out equivalent cover!
If you, or anyone you know, is considering Income Protection, we strongly urge you to act NOW!
If you would like to discuss your options, please get in touch via 1300 077 123 or at firstname.lastname@example.org