Should we be warning consumers about IP prices?

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Russell Hutchinson suggests ways to preposition clients for IP premium increases and discusses the product's potential to keep claimants disabled longer. 

Thursday, July 23rd 2020, 10:12AM 1 Comment

by Russell Hutchinson

Russell Hutchinson

The industry average premium increases over the past five years (for the same age of client) for each category of product has been, on average, an increase of about 6% for short wait periods for income protection and about 8% for long wait periods for income protection – up to the point that Partners Life increased their IP premium just pre-Covid.

They added 12% to rates. This is the underlying rate change – the actual increases consumers experienced were plus inflation, plus age-related increases.

It has probably not been anything like enough. In Australia the regulator is so worried, that they have intervened.

Some insurers in New Zealand are less concerned, but not all.

We know that the current product is both under-priced and the terms are probably too generous. What rate of increase might a client expect over the next five years?

For a client taking out income protection there is, arguably, a duty to disclose this situation, and possibly to illustrate that – alongside expected rate for age increases.

Imagine a case with a quoted premium of about $250 a month for a typical 40-year-old applicant.

A simple statement can be added to the price: "The quoted premium of $250 is likely to rise by 88% to about $470 over the coming five years."

That is a clear statement which underlines the challenge of sustainability in dollar terms for the consumer.

A second approach, is to give the sustainability warning only in cases where a fixed proportion of income is breached.

For example, in the case above, an income of $130,000 would see the annual premium – of about $3,000 – sit fairly comfortably at about 2% of income.

In five years’ time it would be about 4.3% of income – more than most households would spend on insurance as a whole, let alone just income protection.

If APRA and most reinsurers are right, every income protection product that offers a long-term benefit on fixed policy terms is a major risk – and a risk not fixable with a price increase alone.

This is because the incentive to return to work once a claimant has been disabled for a long period of time decline below the payments made by the product.

In that sense, there is a dimension to examine the problem of incentives and consumer harm. It has to be considered that the product itself may be keeping people disabled for longer.

Tags: Income Protection Opinion Russell Hutchinson

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