On the back of the individual disability income insurance (IDII) industry collectively losing more than $3.4 billion over five years, the Australian Prudential Regulation Authority (APRA) has taken action to try to stabilise the industry - announcing a number of important changes in late 2019.

What changes are coming to income protection?

The changes are set to primarily affect retail income protection policies issued after March 31 2020, with APRA essentially proposing to ban the sale of ‘agreed value’ benefits policies, among other changes. APRA is seeking feedback on these proposals by February 29, with planned implementation by June 30 (end of financial year).

Note that these changes are for stand-alone retail policies, and not for policies through your superannuation.

End of agreed value policies

  • “With effect from 31 March 2020, APRA expects that life companies discontinue writing IDII contracts where insurance benefits are not based on income at time of claim, including agreed value (and endorsed agreed value) contracts. “

An agreed value income protection policy is essentially a contract where the insured amount is based on what the individual’s income was when they applied for the policy, as opposed to what it was when they made the claim.

This means that some individuals with an agreed value policy are covered for far more than what they presently earn. According to life insurance provider Metlife, this can discourage claimants from returning to work.

In announcing the change, APRA said it’s “imperative that claim payments should be linked to income at risk at time of claim”.

“Allowing claim payments to exceed the income at risk is inconsistent with the principle of indemnity,” APRA stated.

“This gives rise to moral hazard, heightens risk and impedes sustainability.”

Policies based on last 12 months' income

  • “With effect from 1 July 2021, APRA expects that income at risk for all new IDII contracts be based on annual earnings at the time of claim, not older than 12 months.”

In conjunction with the above change, new income protection policies are set to be strictly linked to income earned over the 12 months up to the time of the claim. This means that if a client changes to a lesser-paying job, they can’t claim based on their old job’s pay. This could also see those that experienced a temporary downturn in their income over the 12 months (e.g. due to periods of redundancy, unpaid leave or maternity leave) receive a significantly lower payout.

Benefits cap for first six months

  • “With effect from 1 July 2021, new IDII contracts will be designed so that insurance benefits do not exceed 100 per cent of earnings at time of claim for the first six months of the claim, taking account of all benefits paid under the IDII product as well as other sources of earned income.”

New income protection insurance policies are set to restrict benefits to 100% of the client’s income for the first six months of the claim.

According to Metlife, this could encourage people to return to work within six months of disability, and undergo rehabilitation or retrain for another role.

75 per cent coverage cap for payments beyond six months

  • “With effect from 1 July 2021, new IDII contracts will be designed so that after the initial six months, insurance benefits are limited to 75 per cent of earnings at time of claim.”

If after the first six months the individual is still unable to work, the benefits could be limited to 75% of their earnings.

Maximum benefit payment

The new maximum benefit payment could be restricted to $30,000 per month (which equates to $360,000 per year), even if this is less than what the individual was earning at the time of making the claim.

This change is said to encourage high income-earners to self insure.

No policies over five years

  •  “With effect from 1 July 2021, APRA expects that life companies will only offer new IDII contracts where: the initial contract is for a term not exceeding 5 years.”

This change is said to ensure the terms and conditions of income protection insurance contracts remain up-to-date with the consumer’s circumstances, as well as external circumstances such as medical advancements.

Right to renew contract without a medical, but occupation and finances to be reviewed

  • “With effect from 1 July 2021, APRA expects that life companies will only offer new IDII contracts where: there is a right for the policy owner to elect to renew the contract for further periods (not exceeding 5 years) without a medical review on the terms and conditions applicable to new contracts that are then on offer by the life company. Changes to occupation and financial circumstances should be considered on renewal.”

While this proposed change will require insurers to allow individuals to renew without medical underwriting, the insurer could be required to review the individual’s income and occupation prior to renewal. This may aid in ensuring the benefits and features of the policy remain appropriate for the individual.

More scrutiny on longer benefit periods

  • “With effect from 1 July 2021, APRA expects that life companies:

    • have effective controls in place to manage the risks associated with long benefit periods (e.g. having a stricter disability definition for long benefit periods); and

    • set internal benchmarks for new IDII products with long benefit periods which reflect the risk appetite and the effectiveness of the controls.”

This change could see more stringent definitions on ‘disability', which is said to make rehab and returning to work more enticing than staying on insurance payouts. Mental illness coverage is sometimes a feature on income protection policies, and that, along with physical disability, may face more scrutiny in 2021.

More up-to-date industry data

“From 1 January 2021, APRA expects that life companies: 

  • contribute to industry experience studies with quality data in a timely manner, enabling the release of results at least every 18 months; 

  • conduct internal experience investigation at least annually and update underlying assumptions if necessary; and 

  • set assumptions using the most recent industry tables, which are based on an industry experience study not older than 18 months, with deviations clearly understood and justified.”

What APRA is essentially proposing here is that industry experience studies no older than 18 months are to be used to justify premium pricing. This is to ensure profitability, risk mitigation, and that insurers aren’t making a loss.

Savings.com.au’s two cents

While it makes sense for these new policies to take shape from an insurer’s point of view, the individual who’s out of work from either disability or redundancy may see it differently. More scrutiny placed on the individual may also raise a few questions, especially if the declared disability is mental and not immediately recognisable.

Deciding whether income protection is right for you is a tricky one. Often, you’ll find that your superannuation fund offers some form of income protection, either on an opt-in or opt-out basis. This can differ from stand-alone retail policies in that you may not get to decide how much you are paid in the event of you not being able to return to work.

If you’re in the market for an income protection insurance policy, it’s important you consider whether it’s better for you take out an insurance policy now, or wait until these new changes take effect.

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