Two futures for income protection cover
There are two futures for income protection insurance. Only one is good.
Thursday, July 7th 2022, 8:52AM 
5 Comments
by Russell Hutchinson
In the good version, clients, insurers, and advisers increasingly recognise the value of having some cover, even if it isn’t the best or most extensive.
By bringing more lives to the market, the product profitability gradually improves, premium increases are moderate and one-year or two-year cover at between 50% and 60% of income to cover a home loan and standard expenses get sold in much higher numbers.
If this kind of IP cover took off, we could see sales double. It would add some much needed ‘true new’ premium to the industry and take income cover from a modest 20% of the market up to something more like 60%.
Most of the balance of the risks are already well covered by savings, early retirement, and costs are met in-part by trauma and medical insurance.
The other future is not so good.
In this version the government launches an income insurance scheme which effectively nationalises the best part of the IP market.
The scheme is budgeted to cost about 2.7% of wages yet a comparison with insurers' experience suggests that is a substantial underestimate. Are we sure that $3 billion annually couldn’t be better spent elsewhere?
But say they press on: consumers lose that income; the market loses from $140 million to $240 million of premium. That in turn drives two more negative changes: longer term IP premiums must rise further due to the loss of the most profitable slice of the premium pie, pushing more and more people out of cover.
Advisers take a hit too: the renewal commissions lost range from $10 million to $15 million annually.
Everyone has a slice of the blame to themselves, whether it is insurers over generous policies, government intervening in the IP market to take the most profitable slice of the pie, research businesses (so that’s me covered) or those advisers pushing only the most comprehensive cover or no cover at all.
We end up with a market where personal IP cover almost ceases to exist while we have a state scheme the keeps getting more expensive because it has no capacity to select risks, underwrite, vary premiums, or manage benefits.
A middle path would be most desirable. To explore what that looks like it probably requires acknowledgement that medium to long-term sickness (which is what IP mostly pays for) is fundamentally different to redundancy and accident insurance.
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Comments from our readers
understand there's a vacancy for a commissioner for groceries.
Do you actually understand how the industry works?
This type of social insurance works well in Europe and Scandinavia and does not reduce IP sales by advisers. Rather it compliments and encourages up take of long term cover. And it provides better economic outcomes for individuals and society as a whole.
The government providing some illness cover raises awareness of the need for the cover. The fact it is only a short term benefit highlights the need to supplement it personally. From an insurer perspective, because the initial period where most claims occur is dealt with by the government is a plus, as it reduces their exposure. This enables lower premiums, so more cover is sold.
Looking at it from a claims perspective, the chances of a claimant getting a long term payout out of IP is vastly superior to getting a TPD claim paid. Ask any NZ insurer for the number of TPD claims they have had in the past 10 years, and how many have been been accepted and paid out.
Also the vast majority of IP contracts are on a 13 week wait, with a five year or to age 65 benefit payment period. Do you really think that moving the wait periodout a little bit to 30 weeks, just over half a year, will make that much difference to sales or claims outcomes?
The nats have already said they will kill it. It's just a question of 23 or 26.
The way things are going, it will be 23.
This is the beautiful thing about NZ, we are all allowed our opinions and to see things from a different perspective. 20 years as a Life adviser, I have seen many things. Sometimes my opinion is correct and some times I am wrong. The joys of living!!
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There will be no viable reason for an insurance company to offer Income Protection at all. If the proposed plan is installed, an insurer would be offering a product designed to support long term disability.
As the first 7 months is covered by Govt and the employer, why would an insurance company want to take on long term claims?
With that happening, NZ will have an increased number of people on a sickness benefit. Those who remain on claim longer than 7 months will be forced onto a sickness benefit.
What will the cost of that be?
This cost is currently funded via premium payers to the insurance company. The future will mean the tax payer will collect that expense. A poorly thought through proposition in my opinion and we can only hope those in power realise it.