The price of sustainable protection: behind the rising cost disability income insurance

As we noted earlier this year, the Australian income protection insurance market is facing a long overdue shake-up.

Under orders from the insurance industry regulator, the Australian Prudential Regulation Authority (APRA), life companies have stopped offering the so-called ‘agreed value’ disability income insurance policies that were identified as part of the problem.

But following the COVID-19 crisis, APRA has delayed some of the other reforms aimed at improving the sustainability of this important life insurance product line. Notably, insurers have been given more time to increase the capital backing of income protection products while talks continue on how to further limit problematic policy features.

In the interim, according to a recent Australian Financial Review (AFR) article, some insurers have embarked on a land-grab to sign up income protection clients under what are, for now, easier policy terms.

“The situation has left market sources fearing a ‘last mover’ problem where consumers flock to companies with overly generous benefits that will threaten to deepen industry losses,” the AFR reported.

And those industry losses have been substantial. APRA figures released early in June show the Australian insurance market booked a net loss of almost $1.4 billion on individual income protection policies for the 12 months to March 31 – almost double the previous year’s profit shortfall. In total, life insurers lost over $1.6 billion during the annual period.

While consumers may find it hard to drum up sympathy for the profit woes of life insurance companies, the current situation has some important implications - especially for those clients who have, or plan to buy, income protection policies.

Undoubtedly, the insurance industry cannot afford to sell income protection policies at a loss indefinitely: the APRA intervention was designed to prevent such an outcome.

At some point, all insurers will have to lift disability income premiums and restrict policy terms if the product is to be sustainable in the long term.

We know income protection cover forms a critical component of many clients’ risk management plans. APRA executive board member, Geoff Summerhayes, acknowledged last December that the product “plays a vital role in providing replacement income to policyholders when they are unable to work due to illness or injury”.

Integro financial advisers are working hard to secure the best terms and the most affordable income protection cover possible for our clients. But we’re also keeping a close eye on the current batch of product offerings to ensure they’re sustainable.

Our aim is to protect your interests for the long term.