Everyone with Income Protection (IP), Trauma or Total and Permanent Disability (TPD) insurances will, most likely, have noticed an increase in their premiums over the last year or two. The increases in the case of IP have been across all of the insurers in the market and have been anywhere from 20% to 72% (and we have seen one insurer of an increase of OVER 100%!). The frustrating aspect has been that these increases have been applied to not only “stepped” but also “level” premium structures. This has created a lot of confusion (as well as angst) for those people that took out a policy on a “level” structure as they believed (quite rightly so) that as they were paying a higher premium initially, the insurer would guarantee to retain that premium rate for the life of the policy.
Unfortunately, this hasn’t been the case. All insurers have the option to increase their premium rates (stepped and level) at anytime in the future. They cannot single out a particular person (after making a claim, for example) at all but they can elect to apply an increase across a certain demographic (eg. Male, non-smoker, professional between the ages of 36-45 years of age). In the past, this would done after actuarial evidence of a particular demographic displaying claim trends outside of the accepted average over a long period of time. As well, insurers would always try and “protect” their level premium clients from these increases as the clients paying this type of premiums were more profitable as people on level premiums were tending to hold their cover for a longer period of time.
Over the past 25 years, insurers have been in “sales” mode, competing with the other insurers to develop products that were more and more attractive to new clients. This lead to some product features, especially in the case of IP, that was totally unsustainable for the long term, from a claims management perspective. As an example, some IP policies allow clients on a claim to return to work for up to 10 hours per week, and still be classified as “totally disabled”. If the policy is an Agreed Value type, this means that the claimant can work and generate income for up to 10 hours per week whilst still being paid a full monthly benefit, without the need to provide any financial evidence on how much they are earning, whilst working those 10 hours. This was originally intended as a rehabilitation benefit to make it easier on the client whilst returning to work. From a “sales” perspective, this benefit was market leading and helped increase the number of clients wanting to take out IP with this feature. Over the next 15 years, most of the insurers adopted this type of disability definition so the market “edge” was diluted. What wasn’t taken into consideration was the ability to administer this definition in the long term from a claims perspective. Another example of an unsustainable product feature on IP was “agreed value”.
This meant that the insurer guaranteed to pay you your monthly insurer amount, even if your income dropped from the time that you took the policy out. They also made the policies “guaranteed renewable” which meant that irrespective of any change to the insured person’s health, occupation, smoking status or pastimes, the insurer HAS to continue to insure you based upon the original terms of the policy, and CANNOT change those terms or increase your premium rates even if you have made several claims on that policy, changed jobs to a much higher risk (bomb disposal) or even taken up smoking.
A fundamental tenement of insurance, whether that be Life insurance or car and house insurance, is that the policy is to put you back in the same financial position (not better, not worse) after the insured event. “Risk” insurance (Life, TPD, IP and Trauma covers) providers threw this out the window and started making products that sold well but were totally unsustainable for the long term!
That time has now come and unfortunately, we are literally paying for it.
Life insurers have successfully lobbied the Government over the last 5 years with the threat to abandon the Australian market if certain changes weren’t made from a legislative perspective. The Government couldn’t afford for insurers to do this as they would be forced to pick up the tab for people calling on the public welfare system to cover their financial losses, etc. The result is that the Australian Prudential Regulatory Authority (APRA) announced changes to insurance, starting with the banning of Agreed Value IP policies on 30th March, 2020 and finishing with even more harsh changes being implemented on 1st of October, 2021. The changes only apply to NEW policies taken out after these dates so if you have cover in place at the moment, your policy is NOT affected.
From the insurance companies perspective, the policies that will be issued after the 1st of October of this year will be MUCH more profitable for them as the policy terms and conditions allow them to re-underwrite your policy EVERY 5 years in regards to the insured persons occupation and pastimes, and change the terms of your policy accordingly.
My apologies for the long-winded article but this now brings me to the very reason you are seeing dramatic increases in your insurance premiums, both stepped and level; the insurers are applying financial pressure to all of their policy holders in an effort to push them into the new, more profitable products. The people who choose to retain their existing policies are those who have experienced a change in their health that prohibits such a swap, and those people that decide that the policy benefits that they have, warrant the increased premiums.
From our perspective, the case for retaining your existing policies is a complex one and should be considered in concert with your present and future insurance needs in mind, along with any budgetary needs. If one was a sceptic, one might even assume that the insurers are using such massive increases in an effort to induce a knee-jerk reaction with the result being some clients contact the insurer direct whose friendly sales team can direct them to their “new and much cheaper” policy alternative!
Unfortunately, we do not believe we have seen the end of the premium increases at this stage but urge everyone to seek advice on if their existing policy suits their needs and circumstances.