The new era of income protection

Income protection (IP) insurance has been the bane of the life insurance industry but the wheels are in motion for a new sustainable era.

According to Australian Prudential Regulation Authority (APRA) data, over the year to 30 June, 2021, the life insurance industry lost $345.5 million from individual disability income insurance (IDII), and the prior year lost $1.29 billion. 

The unsustainability of the products was a result of the vast number of people able to claim and for those on claim to be allowed to stay on claim for longer periods than necessary.

To allow insurers to keep providing income protection, APRA required insurers to cease offering agreed value income protection policies to new clients from 31 March, 2020.

Following this, from 1 October, 2021, insurers were required under APRA to make changes to their income protection policies including income at risk, income replacement ratio, policy contract term, and benefit period.  

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This resulted in the recent trove of new IP products released by insurers that will no doubt be highly scrutinised by the industry and will likely see, according to DEXX&R managing director, Mark Kachor, a number of revisions over the next 12 months.

Kachor said the new products were much more restrictive and financial advisers would need to be very careful when advising clients on existing policies.

“These products typically are only a little cheaper than the vastly more generous existing products the advisers were selling up until the first of October,” he said.

“There is a conflict so advisers need to be careful in spelling out everything a client loses if recommending a replacement of an existing contract that had more generous terms than the new generation contracts on sale now.”

HH Wealth director and financial adviser, Chris Holme, said while the new regime was a good thing and needed to happen for the industry, it would be more onerous for advisers.

“The new products compared to the previous ones aren’t quite as good, especially around being guaranteed re-insurance and the fact that clients have to reapply every five years,” Holme said.

“That’s going to be a little bit more onerous as we’re going to have to make sure that every five years we’re reviewing the policies for clients and continuing to act in their best interests.”

Holme said the new products made advisers more hesitant to change clients in existing policies prior to the new products, and noted there was likely a “mad rush” from advisers getting as many clients onto the old policy wording before 1 October.

While MLC’s general manager for retail distribution, Michael Downey, said he had not seen an uptick in activity prior to the launch of the new products, TAL chief executive, Brett Clark, said the insurer saw an elevated level of adviser activity in the lead up which was expected and anticipated. 

NEW IP PRODUCTS

Holme said advisers would need to put a lot more thought into how to apply for income protection and into what policy as many of the insurers had launched two or three variations of the new products.

“There’s a fair bit more work that you need to do in identifying what suits the client, how to apply for it, whether they actually have existing income protection, and then post that having to review it every five years,” he said.

“That adds another administrative burden but it can be a positive thing because we’re taking into account more needs of the client and tailoring something that is actually in their best interest.”

He noted another pitfall is if clients were self-employed making sure to get three to five years of financial information and being very accurate on what was covered because of the indemnity factor.

“As long as you’re reading up on it and you’re understanding the policy definitions, you should be fine. If you’re haphazardly recommending it without looking at the policy wording you could fall into a trap there,” he said.

“It is going to be harder for advice because there is a lot more definitions and given some companies will bring out two or three policies, you need to be across those.”

Downey said the next 12 months would see advisers working out the new premiums and pricing, and once they had a good feel of the new benefits, features, and definitions they could decide on whether they would move clients to new products or not. But Downey noted there would be some trade-offs to look at.

Clark said both the new and old products would allow the majority of customers to get the base income protection need met. The new products, however, while cheaper, did not have the bells and whistles the old products had.

WILL OLD HABITS DIE? 

Clark noted that it was important for the industry to avoid going back to the poor practices of the past that had gotten it in this situation in the first place. 

The poor practices were insurers looking for more market share through continued product development in terms of widening scope, definitions, and benefits. This led to more claims and thus higher prices. 

“It’s certainly a period of significant disruption right now. I’ve got no doubt that as companies better understand the customer experience, adviser experience, and the claims experience that these products will continue to evolve over the months and years ahead,” Clark said.

“I really hope the industry has learnt it’s lessons over the last few years and doesn’t fall back to poor practices and if they do then I’m reasonably confident APRA will hold us to account and they should.”

Downey said avoiding poor practices relied on insurers designing sensible products with good benefits and features, sustainable definitions, competitive but sustainable pricing, and not just trying to pick up market share for a year or two.

“It’s really about working with the regulator and making sure we as an industry stick to their guidelines and turn this industry around. We need to make sure all of us are running sustainable, long-term income protection books because it’s such an important product offering out there for Australians to access,” he said.

Downey said the industry was more mature and that the dynamics had changed as the number of insurers had decreased and they were no longer fighting for 1% or 2% extra in market share. 

“If you have six or seven reasonable insurers and you have your 15% market share that’s probably a pretty good result and you could run a long-term sustainable business,” he said.

“We’re all signed up to working with the regulator and if we get this wrong in the next few years the regulators can go a bit harder on us. We should control our own destiny and not have the regulator trying to drive the conversation. We’ve got to take a leadership position here.

“I’m optimistic that we are all going to do the right thing and we’re not going to fall into that old trap of just trying to chase market share for the sake of it.”

THE ADVICE CONUNDRUM

While many Australians will need access to income protection at some point, it is important to note that income protection benefits are generally for people under 65.

However, it is the younger cohort that find financial advice unaffordable. This issue is further exacerbated with advisers leaving the industry including those who have specialised in risk but find they are no longer able to grow their business due to red tape.

Holme said it would be difficult to be a risk adviser at this time given the lowering of commissions and compliance burden. 

Given most advisers are holistic advisers focused on wealth creation, Holme said it was unlikely holistic advisers would do as much research into risk insurance despite the country being underinsured. 

“Taking away commissions from risk advisers makes it less favourable to be in that profession which means there’s going to be less people insured. It’s not really working as they were expecting it to. I think they were trying to overcome people rewriting policies, taking large commissions, and over insurance but I don’t actually think there was much of that out there,” he said.

“The fact that they’ve decreased commissions and they’ve made it harder to write businesses is actually shooting themselves in the foot.”

Kachor said this was a perfect storm and the industry needed to work through it and figure out who was going to train new advisers to give them expert knowledge on risk life insurance product knowledge, as a university degree did not suffice in this area.

Holme said he experienced difficult conversations with clients who only wanted risk advice and were not looking for a full statement of advice but were bound by compliance.

“How does someone propose that they pay a $3,000 plan fee to just get an income protection product? There’s a gap in the market there that they’re creating because the risk advisers are leaving the industry,” he said.

“So how do people obtain insurance, if that’s just what they want, without having to go through the whole advice process and pay all the fees associated with that? We have to charge those fees because that’s to cover the cost of compliance and the cost to serve otherwise it’s not profitable for us.

“I just try and show as much value as I can for clients and try and get them to understand that it’s better for them to do advice on all areas and make income protection a part of it.”

INSURER SUPPORT FOR ADVISERS

Downey said MLC and other insurers were looking to partner with technology firms to reduce the compliance burden advisers faced when constructing insurance advice from 15 hours to an hour or two.

“This would help with reducing the cost to serve and potentially still maintaining an appropriate profit margin for those advisers and their businesses,” he said.

“Advisers could have access to the offering either through the licensee they’re networked with or if they want to pay for a small fee for part of the technology.”

Both Downey and Clark said life insurers needed to work with and support the advice industry. 

Clark said this partnership extended beyond just providing new products including customer support and helping them be better advisers through education. 

“We’re putting a lot of investing into our support and partnership with advisers through things like Risk Academy,” he said.

Clark said he was empathetic to the change in disruption for advisers over the last few years but believed there was an opportunity to look forward to through the Quality of Advice Review and other advocacy efforts to support financial advice in the future. 

“The next three to five years is about working closely together, building together our confidence and optimism and as a result continuing to grow our industry again,” he said.

Kachor believed life companies that were strong in providing education and technical resources would play a significant role in supporting advisers.

“I think we’re going to go a bit back to the past where life companies are really going to have to step up, and they can without getting into conflicted remuneration space, by providing education and technical resources,” he said.

“Dealer group internal support for risk advisers is typically quite small and there’s only a small number of dealer groups who have risk experts on the payroll to support advisers.”

Holme said it was important for insurers to provide support, assistance, and communication and to be “absolutely triple A grade on claims”. 

“They can be sort of average on the upfront stuff when you’re writing policy but if they’re not good on the claims side of things that’s where it really counts,” he said.

Despite the challenges, Kachor said he was optimistic for the future of life insurance given people still died, could get critically ill, or could get disabled meaning insurance was still a core need.

“We’re going through a shakeout of all the existing practices and entering a phase of reinvention and in three to five years down the road we are going to emerge from this with a stronger and more resilient distribution models and growing distribution models,” he said.

Downey was also confident about the future and said the advice industry would come out stronger and that well capitalised and well-run life insurance companies would be around for many years.