THE NEW INSURANCE LANDSCAPE

We have had a vast influx of enquiries with regards to insurances and premium increases, so what has been happening in the world of insurance?

  • Life insurance companies have not been profitable and ASIC mandated significant changes, requiring insurers to transform their products and offerings moving forward. Income Protection policies have been the most significantly impacted by the enforced changes, as well as premium increases across all insurers.

  • For clients who already hold an insurance policy, the changes have been grandfathered (protected).

  • For new policies or if you switch insurers, you are unlikely to receive the same comprehensive product as most insurers have reduced the benefits and increased premiums on the new style of policies available.

  • We always recommend that you review your personal insurance policies, but remember we are no longer legally able to provide you with advice without taking into consideration your overall circumstances. What does this mean? You will need to meet with your adviser and discuss your overall circumstances to allow them to provide you with holistic advice that has considered your short term and long term position, your adviser will provide you with a financial planning proposal outlining the advice that will be provided and the fees involved.

  • Financial planning is a highly valuable process that includes a plan toward self-insurance and/or reducing your insurance premiums over time as you reach financial milestones.

Several changes to income protection came into effect in October 2021. What changed and how could it affect you?

On 1 October 2021, new changes will be coming into effect for income protection. The Australian Prudential Regulation Authority (APRA) changes are likely to have an impact on people seeking to take out income protection cover or make changes to their existing cover.

Importantly though, for policyholders, while these changes may impact your level of benefit come claim time, the claims process remains the same, according to your chosen provider.

Changes coming into effect include:

  • Benefits will be capped at 90% of your earnings for six months and then capped at 70% for the remaining benefit period. This ensures the benefit cannot exceed 100% of your earnings due to extra features and ancillary benefits such as advance payments or rehabilitation benefits.

  • The way your income is calculated will change, with income based on annual earnings at the time of the claim, rather than the highest 12 months worth of earnings in the few years prior to the claim. Of course, when it comes to self-employed or business owners where income is variable, income should be taken on the most appropriate time period and reflect future possible earnings.

  • Stricter disability definitions are coming into force. For policy providers, this has been put in place to manage the risks that are often involved with longer benefit periods.

Will the changes affect the claims process?

  • The changes have been put into place by APRA to help improve the sustainability of the income protection insurance industry, which has taken a heavy hit of $3.4 billion worth of losses over the past five years.

  • It’s always best to speak to the experts, who will be able to advise you on what is changing and how it may impact your individual policy. The TAL team is also available to answer any questions you may have regarding a new policy you wish to take out.

(Source: TAL November 2021)

KEY APRA REQUIREMENTS ON INSURERS FROM OCTOBER 2021

By 1 October 2021, insurers will be required to make further changes to their IP policies, including (Source: AIA 2021):

  • For clients with predominantly stable income, income should be based on annual earnings at the time of the claim event, not older than 12 months. This means that current indemnity IP policies that base benefits on the highest 12 months’ earnings in the two or three years prior to claim will no longer be available.

    However, for clients with income that is variable (e.g. Self-employed or business owner clients), income should be based on the average annual earnings over a period of time (can be longer than 12 months) that is appropriate for the occupation of the client and reflective of future earnings lost because of the disability. This flexibility may also benefit clients whose income fluctuates due to reasons such as unpaid parental leave or contract workers.

  • Income replacement will be capped to a maximum of 90% of earnings in the first six months of claim and then 70% of earnings thereafter.

    APRA’s reason for change is that existing IP products have features and ancillary benefits (e.g. advance payments, rehabilitation benefits, etc) that may cause the insurance benefit to exceed 100% of earnings at claim and therefore reduce incentives for the claimant to return to work.

  • IP policy terms must not exceed five years. After the five-year period, a new policy must be entered into that reflects the terms and conditions that apply to new contracts then on offer by the life company. If a client enters a new contract after the initial five years, medical underwriting is not required however any changes to the client’s occupation, financial circumstances and dangerous pastimes must be updated and reflected in the new policy.

  • Life companies must ensure effective controls are in place to manage the risks associated with longer IP benefit periods. There are various ways that insurers can control long-term claims including tiered or stricter disability definition, tiered income replacement ratios, or lower maximum termination ages.

General Advice Warning

This information has been prepared and provided without taking into account your objectives, financial situation or needs. Before acting on this information, you should consider its appropriateness (having regard to your objectives, financial situation and needs) and any other information pertaining to your superannuation product by referring to its PDS.