Time for radical overhaul of disability insurance

11 February 2020
| By Mike |
image
image
expand image

Moves by life insurers to increase premiums around disability income insurance (DII) are simply perpetuating potential anti-selecting lapses and may lead to worse claims experiences and falling profit margins, according to an analysis conducted by the Institute of Actuaries of Australia.

The analysis, released this week, called for substantial and urgent reform of the DII sector and has come as the institute announced the formation of a DII taskforce which has started liaising with regulators and which hopes to engage with insurers, advisers and product ratings agencies to drive long-term change.

As part of the move, the institute engaged KPMG to compile a comparative research report which found, in broad terms, that the sector needed simpler products, a reduction of ‘bells and whistles’, a change of definitions and a review of the benefits to encourage those who can, to return to better health as soon as possible.

The convenor of the Actuaries Institute Disability Insurance Taskforce, Ian Laughlin said modern life insurance provided valuable financial benefits for people who can’t earn an income due to injury or sickness.

However, in Australia’s competitive market, customers had been offered a smorgasbord of product features but also been subjected to multiple unanticipated premium increases. 

“A decline in insurance company profitability despite these steep premium hikes has called into question the sustainability of disability income insurance in its current form, and suggests the potential for market failure,” Laughlin said.  “That raises real concerns for consumers, and the broader community, about future access to affordable DII cover.”

The report noted that life companies had collectively lost around $3.4 billion over the past five years through the sale of DII to individuals and compared Australia to other jurisdictions, concluding that Australian products were too generous with more features, higher issue limits, longer benefit periods and shorter waiting times.

It pointed to the UK where employees were provided with services that allowed them to return to work before they were eligible for payments and said that, by contrast, in Australia there were limits on what early rehabilitation services could be offered, particularly when a policy was written through a member’s superannuation fund.

Daniel Longden, KPMG actuarial and financial risk partner, said: “Our research found that Australian workers tend to have higher payouts than their counterparts in comparable jurisdictions.  A replacement rate of 75% of earnings is quite common in Australia with up to 80% replacement ratios available”.

"By contrast replacement rates in the US are generally 50-65% of income, and in the UK 60-65% of income,” he said.

"In some circumstances, where an Australian policyholder has an income replacement ratio of 75%, the policy may typically permit more than 102% of pre-disability take-home pay. A high replacement ratio can be a disincentive to returning to work.”

Read more about:

AUTHOR

Recommended for you

sub-bgsidebar subscription

Never miss the latest news and developments in wealth management industry

MARKET INSIGHTS

GG

So shareholders lose a dividend plus have seen the erosion of value. Qantas decides to clawback remuneration from Alan ...

2 months 1 week ago
Denise Baker

This is why I left my last position. There was no interest in giving the client quality time, it was all about bumping ...

2 months 1 week ago
gonski

So the Hayne Royal Commission has left us with this. What a sad day for the financial planning industry. Clearly most ...

2 months 1 week ago

A Sydney-based financial adviser has been banned from providing financial services in the interest of consumer protection after failing to act on conduct concerns. ...

3 weeks 3 days ago

ASIC has cancelled the AFSL of a $250 million Sydney fund manager, one of two AFSL cancellations announced by the corporate regulator....

3 weeks 1 day ago

Having divested its advice business in August, AMP is undergoing restructuring in at least four other departments amid a cost simplification program....

2 weeks 5 days ago