Based upon the individual disability income insurance industry collectively losing around $3.4 billion over the past 5 years, and $1 billion over the last 12 months, on Monday 2 December 2019, APRA proposed a number of changes to retail (advised) income protection. These proposals are intended to ensure that the retail income protection market remains viable over both the long term and short term and will help to avoid participants withdrawing from the market. APRA is asking for feedback on these proposals by 29 February 2020, in preparation for implementation by 30 June 2020.

Proposals and Impact

Below are some of the measures proposed by APRA, and the potential consequences for clients if these proposals are implemented. 

For income protection policies issued from 31 March 2020:

1. Life insurance companies will be unable to issue any new agreed value policies.

The intent of this proposal is to avoid the situations where due to automatic indexation of income protection benefits and low wages growth, there are some clients who have a monthly income protection benefit that is greater than their actual income.  This can discourage claimants from returning to work.

For income protection policies issued from 1 July 2021:

2. Benefits will be based upon the life insured’s income over the preceding 12 months. 

The intent of this proposal is to ensure that the monthly income protection benefit paid is linked to the actual income being earned at time of claim. Where the life insured has changed jobs and is earning less at time of claim than at the time of policy application this can discourage claimants from returning to work.  

3. Insurance benefits, and other earned income, will not exceed 100 per cent of the life insured’s income for the first 6 months of benefit payments.

The intent of this proposal is to encourage individuals to either retrain to another occupation or to undertake rehabilitation to return to their previous role.   By prohibiting individuals from earning more than 100 per cent of their pre-disability income it is intended to encourage individuals to return to work within 6 months of disability.

4. Insurance benefits, and other earned income, will not exceed 75 per cent of the life insured’s income for benefit payments that are longer than 6 months.   

The intent of this proposal is to encourage individuals to either retrain to another occupation or to undertake rehabilitation to return to their previous role.   By prohibiting individuals from earning more than 75 per cent of their pre-disability income it is intended to reduce the moral hazard and encourage individuals to return to work.

5. Maximum benefit payment of $30,000 per month.  

The intent of this proposal is to encourage those individuals who are in the top 5% of all income earners in Australia to self-insure where the benefit payments are more than $360,000 per annum (annual income of $480,000 or more).

6. Policy term shall not exceed 5 years

This proposal is intended to limit benefits that are no longer relevant based upon current social norms and medical advancements.

7. After the first 5 years, the policy may be renewed without medical underwriting, but both income and occupation will need to be reviewed and confirmed.  

This proposal is intended to ensure the benefits and features are appropriately priced based upon the risks associated with the individual.  Individuals rarely have the same job for their entire careers (as was the case when income protection was originally invented), with most people having at least 8 different roles throughout their working career.

8. After the first 5 years, the terms and conditions issued on the new policy must be based on the current policy on issue at the time of renewal.

This proposal is intended to limit benefits that are no longer relevant based upon current social norms and medical advancements.

9. Longer benefit periods must have more stringent disability definitions.

The intent of this proposal is to encourage individuals to either retrain to another occupation or to undertake rehabilitation to return to their previous role.   By making the disability definition more restrictive after a defined period of time, it is intended to reduce the moral hazard and encourage individuals to return to work.

For income protection policies issued from 1 January 2021:

10. Premium pricing must be based upon industry experience studies that are no more than 18 months old.

The intent of this proposal is to ensure that life insurance companies charge premiums that accurately reflect the risks associated with income protection policies, and do not run at a loss.

It is hoped that the APRA proposals will allow the individual income protection market to remain viable and sustainable into the future. The 10 recent APRA proposals will change the individual disability income insurance (retail income protection) benefit design. Care will need to be taken to ensure that these measures do not create unintended drawbacks for clients or risks for insurers in light of future legislative changes such as the unfair contract terms regime and design and distribution obligations.

We broadly support the intent of these measures which will help to stabilise the market for individual disability insurance and make it more sustainable. We are formulating our views on each of the measures and will be providing feedback to APRA on some of the technical aspects and potential unintended consequences.