2 Comments 2 Commentsby Russell Hutchinson
Russell Hutchinson
Although the changes recently announced by Partners Life are significant, changes to how the product treats the self-employed are unlikely to be enough to manage the problem of income protection profitability.
Gen Re, for example, believes that long-term income replacement is a fundamentally different proposition to short-term replacement. In their analysis (link below), any long-run benefit period (meaning to age 60 or longer) is at risk – they make no distinction between self-employed and employees. Why is this? Two examples are given which draw parallels between what we do with income protection and general insurance.
The first is that you can change what you do for work and there will be no change in premium or terms. This was not always the case. Back in the late 1980s you were required by some insurers to advise of changes in occupation and the rate would be revised. This is the equivalent of insuring a $5 million property in Devonport but the client moves to a unit on the city fringe a year or two later – yet retains the same cover value.
The second is that there is no mechanism to require the client to minimise loss – meaning to take part-time work if they are capable of it – or to work more than ten hours per week. Back in our general insurance example, the power is largely with the client to declare the house a total loss, rather than to repair.
APRA similarly sees the problem as long-term benefits, further complicating issues for life insurers, where our brand is strongly associated with the long-term, set-and-forget, nature of our products. The Partners Life changes closely follow APRA’s concerns about replacement ratios in several ways (no agreed value; new pre-disability income definition; and restrictions on combinations of covers) but don’t (yet) follow two of its other suggested restrictions:
Although the new restriction on claims with "self-reported" symptoms, now mandatory for self-employed, but optional for the employed, allows an innovative suggestion for how part of the last requirement may be met, it does not appear to deal with all APRA’s concerns. Our regulator has not, yet, signalled similar requirements, but I bet we will hear more about this subject.
APRA's letter in December 2019 requiring sustainability measures are introduced
Gen Re's Andres Webersinke's paper: Time for Action
KPMG's paper, including links to an international comparison
Clearview's white paper on income protection from January 2019
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