Compare Club data shows that trades people and other small business owners are being “priced out” of individual disability income insurance (DII), also known as income protection. In a media release, the comparison business said its data revealed that premiums have increased very sharply in recent months, on average by more than 35%, but some by more than 300%.
Lisa Varker (pictured above), a life insurance advisor with the firm, said policyholders are dealing with these rising costs by reducing the quality of their protection or dropping the coverage all together.
“I’ve been getting an influx of very angry clients,” said Melbourne-based Varker, who told Insurance Business she has about 3,000 customers, many with these covers. “They’re reacting to their renewals and to the increases on their covers and they don’t go to the insurer to complain about it, they come to me because I’m the advisor on their policy.”
In this case, the financial adviser is finding herself in the same situation as any insurance broker: trying to help a customer deal with the impacts of an insurer’s decision to change a policy.
One couple, she said, paid $600 a month for income protection three years ago with a sum insured of more than $6,000. Their policy recently went up to $700 and only covers about half of the previous sum insured.
The recent inflation spikes are one reason for the increases, but much of the negative impact on her customers, said Varker, is a result of insurance companies changing their income protection offerings in response to APRA’s 2020 market intervention.
The regulator said its industry intervention was the result of insurer losses of $3.4 billion during the previous five years. The changes brought in by APRA included obliging insurers to cease issuing agreed value policies and ensure benefits did not exceed the policyholder’s income at the time of the claim.
“Nearly all of the contracts I deal with were set up on an agreed value contract because they were tradies with fluctuating incomes,” she said. “It was good for a fluctuating income because you’re locking your sum insured and if your income does fluctuate, it’s not going to matter because you’ve got it locked in.”
However, APRA linked these agreed value contracts to the huge insurer losses in the market. Varker said, in response, many new and changed income protection policies from insurers are offering far less income protection.
She said, “nearly all” her clients, once they see the renewal price of their income protection insurance, “want to know ways to get the cost down.” In response to a question from Insurance Business, Varker said about half of her customers are downgrading their coverage significantly and some are dropping it altogether.
“Yes, I’m getting quite a few clients just dropping it,” she said.
Inflation, Varker said, is another factor playing into her clients’ challenges.
“A lot of these [income protection] policies have the built in CPI [consumer price index] protection,” she said. “Each year, they will automatically increase their sums, ensuring it’s in line with inflation.”
However, because inflation has risen so sharply over the last 12 to 18 months, the majority of her clients are declining this automatic CPI increase to save money.
Other clients are making cost savings in other ways.
“A fair percentage of them have at least asked, if not proceeded, to get quotes to have a longer wait period,” she said. “In the worst case scenarios, some of the older clients, potentially, are going to only have maybe a seven- or eight-year claim and might get quotes to go for a five-year benefit period rather than continuing on to 65.”
Varker said the new income protection offerings from insurers tend to offer “a much inferior product” and, relatively speaking, are not much cheaper than older policies.
“The new basic contracts with indemnity but no bells and whistles, they’re only 20 or 30% cheaper than the old products,” she said.
When APRA announced its market intervention in 2019, the regulator said there was a “genuine risk insurers may start withdrawing from the market.”
“In a drive for market share, life companies have been keeping premiums at unsustainably low levels and designing policies with excessively generous features and terms that, in some cases, provide a financial disincentive for policyholders to return to work,” said executive board member Geoff Summerhayes in a media release.
“Insurers know what the problems are, but the fear of first-mover disadvantage has proven to be an insurmountable barrier to them making the necessary changes,” said Summerhayes. “By introducing this package of measures, APRA is forcing the industry to better manage the risks associated with DII and to address unsustainable product design features – or face additional financial penalties.”
Income protection is traditionally offered by licensed financial advisers. Insurance brokers are only licensed to provide alternatives like personal accident insurance that, according to some brokers, are different and don’t usually offer the same depth or breadth of coverage.
Are you an insurance broker? Do you have small business customers seeking alternative covers to income protection as a result of pressures in this space? Please tell us your experience below
