Like mortgages, once upon a time life insurance policies and portfolios would incur little change year-on-year and, as a consequence, it was common to see the ‘set and forget’ practice of many clients and advisors. This attitude was aided also by the fact that many Australian’s held a vast majority of their personal insurances within the superannuation environment which often meant they were out of sight and mind.
Over the past few years, however, we have seen increasing volatility and some significant premium increases most notably around income protection as well as Life & TPD cover within industry superfunds. It was evident that insurers had concerns about keeping the income protection product profitable but we’re not sure anyone saw the enormity of losses that were about to ensue.
In the 12 months to March 2020, the industry as a whole reported an after-tax loss of $1.8bn dollars, an incredible transition from a $760m profit in previous 12 months. Some of this was due to poor investment results in the Dec and Mar quarters due to COVID-19 but much of it was also due to income protection products which were contributing losses in excess of $100m per month.
This can be seen below in our governing body, APRA’s, recent quarterly statistics report to March 2020.
The reasons behind these results are varied but most notably they are due to;
- Claims experience being far greater than ever anticipated driven largely by an increase in musculoskeletal and mental health claims
- Extremely low returns on investment. Insurers place their deposits into bonds and other fixed interest products and with interest rates at globally low levels, they are simply not making the returns that were forecasted years before when policies were being priced
- Regulatory change in the superannuation industry for those with inactive accounts or under the age of 25
It is the trend seen in the graphs above that is worrying however and the reason that APRA has now seen fit to step in to enforce product change with the first having been the abolishment of new ‘agreed value’ income protection policies from the 1st of April, 2020. This is one of a number of changes that will be seen over the coming 12-18 months (and perhaps beyond) aimed at achieving APRA’s clear mandate for income protection products to become profitable in their own right and not subsidised by lump sum products.
Along with product amendments, the impact most keenly felt for our clients has been the significant premium increases that almost every insurer has already implemented and the likelihood is that more are to come. Just this week, OnePath announced a 25% increase to IP (Income Protection) premiums for both stepped and level premiums and we’ve seen similar (and some even greater) increases from many other insurers over the past few months.
The importance of reviewing your portfolio
Once, this industry would see little change to policies year on year. This narrative certainly does not ring true for the next 36 months (at least) and our focus at MBS Insurance is strictly to deliver better outcomes and proactively manage our clients’ insurance needs and portfolios.
We have believed for the past few years that the economics of the industry were heading in this direction and whilst we did not necessarily expect the severity of these results, we have been proactively driving discounted product arrangements with our Insurer partners. This is not only for new clients, but also existing policy holders.
While reduced premiums appear contrary to what the industry requires, we are in the fortunate position of having a scaled distribution business model, with a client base in a desirable demographic. Moreover, the philosophy of treating Insurers like partners ensures our clients attain better outcomes and we will continue to proactively mitigate the impact of these changes on our clients via negotiated terms and client engagement, to ensure portfolios remain appropriate and necessary.
Whilst we have always sought to disrupt the ‘set and forget’ culture within our industry, this product change and premium volatility has meant that the engagement of our clients at review time has never been greater, which is pleasing. However, I would implore anyone with personal insurances in place, whether through their superfund or in a retail policy, to ensure that your existing portfolio is reviewed to ensure it remains the most appropriate and competitive portfolio available.
A ‘set and forget’ attitude can no longer persist… Please get in touch 02 9415 1511 or email email@example.com.