When indexed IP policy pay-outs exceed actual earnings
Many indexed income protection policies are paying out more than people are actually earning and this, in turn, is impacting claims experience, according to a white paper developed by life/risk insurer, ClearView.
The white paper, authored by ClearView’s chief actuary and risk officer, Greg Martin has argued for a fresh approach to income protection portfolios to break what he describes as a worrying pattern of rising claims and then rising premiums.
Martin argues that demand for income protection insurance should be unshakably strong because it protects what is arguably a person’s most valuable asset – their ability to earn money throughout their working life, yet many Australians are more likely to buy insurance to protect their car or pet.
“It’s too simplistic to blame heightened media and regulatory scrutiny of the financial services industry, mounting mental health-related claims and recent price instability for the discontentment of both consumers and insurers,” he argues.
Martin said focusing on these factors alone would not properly address the issue and cited the effects of cyclical trends in underemployment (as opposed to headline unemployment) and slow wages growth as key factors behind the decline of income protection.
He said headlines heralding Australia’s almost 30 years of uninterrupted economic growth and prosperity paint a rosier picture than what the average worker was actually experiencing.
“Income protection claims follow economic cycles, with poor economic circumstances driving increased claims. The industry’s claims experience reflects the underlying reality rather than the headlines,” Martin said.
“On top of this, the long period of weak wages growth has resulted in many indexed insured benefit amounts exceeding policyholders’ actual income ratios, meaning the insured benefits are providing increasing income replacement ratios. Higher income replacement ratios also result in higher claims rates so there’s a double impact.”
“Income protection insurance is arguably the most important of all life insurances. No other cover directly provides protection for our most important asset; our future earnings capacity. That’s why the industry must get this right,” Martin said.
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