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APRA Changes to Income Protection

This article appeared in The West Australian, Your Money, on Monday 2 March 2020.

APRA, the financial services regulator, is banning any new Agreed Value Income Protection contracts from 1 April 2020. This is in response to its findings that in the last 5 years, life insurance companies had lost $3.4 billion through offering disability income insurance (DII) policies, and concerns that should this continue, there was a real possibility insurers would completely withdraw from this market.

Agreed Value contracts allow you to have your income underwritten at the time of application, and the insurer is obliged to pay that monthly amount to you in the event of disability, regardless of what your earnings are at the time of claim.  This is very important for people who perhaps have fluctuating income, like business owners whose profitability can change from year to year, or those with variable earnings like real estate agents.  It gives those who hold these policies certainty, and removes the requirement to prove income at what may be an already difficult time.  Unfortunately, it also can remove the incentive for some to go back to work, if the amount they are receiving is greater than what they could otherwise be earning.  Mental health is a major, and growing area of claim for insurers, and indeed the stress and depression that a dramatic drop in earnings can bring may be the trigger for a claim that allows the insured to receive an income closer to levels they may have previously enjoyed.

Instead, policies will now only be offered on an indemnity basis.  Indemnity means that the sum insured will be assessed at the time of claim, and a benefit paid on earnings in that 12 month period.

Furthermore, from that same date, all new Income Protection policies will be subject to rolling 5 year re-assessments, and at that point the insurer may choose to change the terms of your contract, or not offer a renewal at all.  Guaranteed renewability meant that once you were accepted for cover by the insurer, they had to continue to offer you the insurance, at those original terms, regardless of the change in your circumstances.  For example, you may have been in a sedentary, administrative job and had cover accepted and premiums set at that occupational rating.  If you then went to a riskier job, for example, a shot firer in the mining industry, you would still be covered and pay premiums as if you were sitting in an office, rather than working with explosives.  APRA considers this to be another major obstacle for future sustainability, and will enforce the new regular reassessments, allowing insurers to change their terms if you change your circumstances.

Finally, APRA has requested insurers better manage risks associated with long term claims, in many cases paying through to age 65.  This will mean changes to the definition of a disability the longer the claim is in place.

The good news is that those who have income protection policies already in place will not be affected by these changes, unless they cancel or let their policies lapse reapply after 1 April. Holding onto one of these pre April 2020 policies may well become very important moving forward. If you have been considering applying for income protection, and agreed value and guaranteed renewability are important to you, it may be that now is the time to implement the cover before the generous benefits cease.

We are told this change is vital to ensure the viability of the insurance market in Australia, and APRA feel very strongly about the importance of this cover in the community.  Their Executive Board Member Geoff Summerhayes summed up the regulators stance in the following way: “The ultimate outcome should be more financially resilient life companies and more sustainable products for policyholders. Unless insurers stop losing hundreds of millions of dollars each year, it’s only a matter of time until individual DII – and the protection it provides – is no longer available at all.”

Raymond Pecotic is the Managing Director of Empire Financial Group.

This article was written by Raymond Pecotic, Managing Director of Empire Financial Group.