A ‘set and forget’ attitude can no longer persist

A ‘set and forget’ attitude can no longer persist

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 reception@primeadvisory.com.au.

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A message from MBS insurance regarding the impact of COVID-19.

A message from MBS insurance regarding the impact of COVID-19.

“We have received some enquiries from our clients around the impact of Coronavirus. There are no exclusions to Life Insurance, TPD, Trauma or Income Protection that would prevent payment of a claim related to a Coronavirus for existing retail insurance policy holders.

We have seen and received announcements confirming this for policy holders of AMP, MLC, BT, AIA, CommInsure, OnePath, Zurich, Clearview, TAL and Asteron. Nick Kirwan, Senior Policy Manager at the Financial Services Council stated on the FSC website that no-one should be concerned about their existing life insurance policies.

We are aware of some Industry or Corporate Super Fund policies that do exclude pandemics and/or epidemics. If you or a family member have one of these policies, please reach out to your Adviser.

As is always the case, we are driven to provide protection at a time of need and deliver better outcomes for our clients. If you experience any downtime, it may be the ideal opportunity to have your insurance portfolio reviewed.  If you wish to speak with your Adviser, it will be more efficient to email them directly or at enquiries@mbsinsurance.com.au.

Our team has been set up to work from home, so the business will continue as usual however limited staff members will be answering phones.”

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‘Lifestyle assets’ – the next ATO target

‘Lifestyle assets’ – the next ATO target

As the ATO cracks down on taxpayers with their recent data matching program rollout,  this will now allow the matching of “lifestyle assets” such as yachts, fine arts and thoroughbred horses by requesting insurance policy information from 30 insurers which will assist to automate compliance activity.  The existence of an insurance policy could alert the ATO of the taxpayer’s wealth and identify where the taxpayer has non disclosure their all their assets.   

The ATO expect 350,000 taxpayers to be impacted by this review as they reveal undisclosed or unreported income from the 2015-16 financial year to today. Deputy Commissioner Deborah Jenkins says, “If a taxpayer is reporting a taxable income of $70,000 to us but we know they own a three million dollar yacht then this is likely to raise some red flags,” Deputy Commissioner Deborah Jenkins said. 

The ATO is looking for: 

  • under-reporting of income and mismatches between lifestyle assets and reported income,  
  • the purchase of assets in a company name but where those assets are used for private purposes (incorrect claims or non-reporting of GST credits, FBT, Division 7A, capital gains tax), and
  • lifestyle assets purchased by self-managed superannuation funds that might breach the sole purpose test. 

Unsure what that may mean for you and need some advice? Get in touch today 02 9415 1511 or email reception@primeadvisory.com.au. 

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Agreed value income protection to be a thing of the past…

Agreed value income protection to be a thing of the past…

Are you currently or moving towards self-employment? Do you receive a base salary but have fluctuating income with bonuses and commission? – this is a MUST read.

Recently, APRA has imposed sustainability measures on the life insurance industry with a particular focus on the income protection product due to significant industry wide losses over recent years. As of April 1, 2020, new ‘agreed value’ income protection policies will no longer be available in the market. This has significant ramifications for those who are self-employed or who are likely to become self-employed in the future, as well as those who have significant bonus portions to their income.  Given its pertinence for many in our client base, we wanted to reach out to you to ensure that, at the very least, you understand these implications and ensure that any existing policies are reviewed or that you look to implement cover that will protect you in the long term.

What is the difference between agreed and indemnity? 
To give you some context, there are 2 types of income protection policies – ‘agreed value’ and indemnity – and there is one fundamental difference.

Agreed value contracts are offered by insurers having seen a client’s recent history of earnings at the time of application and they ‘agree’ that they will offer a certain sum insured based on those earnings.  In practice this means that in almost every instance, whatever the client earns in the future is irrelevant as the insurance policy will pay out whatever sum is in place at the time of a claim regardless of their earnings at that time.

An indemnity contract on the other hand does not require financials upfront but whenever a client goes to claim on that policy, they need to produce evidence of their recent earnings to justify the level of cover they have in place and are indeed paying for.

Indemnity contracts may be perfectly reasonable for PAYG employees with steady (and generally increasing) incomes but self-employed clients with potentially fluctuant incomes from year to year typically want the certainty that what they’re paying for is going to be received at claim time when and if they need it.  They do not want to be exposed to the scenario where they have a period (before claiming) where they’re working a little less, have taken some time off or have just had a leaner period of earnings and for that to form the basis for an insurers payout figure.  Moreover, many of our clients have ‘level premium’ policies in place for sustainable premiums and long term savings and the certainty of an agreed value contract over that time is extremely comforting.

What now?
For the reasons cited above, we believe that it’s important that you are made aware of this imminent development and have a chance to make any necessary changes to existing cover or implement new cover if nothing is in place.  Also, be aware that any ‘agreed value’ policies in place before April 1 of this year will remain in place and can be amended in any way moving forward. If would like your cover reviewed, please give us a call 9415 1511 to have one of our insurance experts give you a complimentary review, or email us.

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Why Your Insurance Premiums Could Skyrocket!

Why Your Insurance Premiums Could Skyrocket!

As you may be aware, from 1 July 2019, new ‘Protecting Your Super’ laws came into effect. They were brought in to ensure that super account balances are not being unnecessarily eroded by fees and insurance premiums, particularly for accounts that have a low balance or have been inactive for a certain period. One of these measures relates to automatic cancellation of insurance cover for inactive super accounts and this is triggered if there have been no contributions for 16 consecutive months unless the member ‘opts in’ to keep the insurance.  Forefront in the government’s mind in making these changes were younger people who had yet to consolidate several superfunds opened during their fledgling careers and who also potentially were less likely to require insurance cover at that time.

These changes will have enormous flow on effects for the premiums of those with insurances remaining within the superfund environment. Insurance, fundamentally, is a risk pool – a large group of individuals that allows the higher costs of the less healthy to be subsidised by the relatively lesser costs of the healthy. This fundamental principle will be impacted greatly by these sweeping super laws. As mentioned earlier, a significant proportion of the automatic cancellations will be those younger people who hadn’t consolidated multiple funds. These premiums represent a significant chunk of the healthy ‘subsidisers’ and that means that superfunds will be forced to increase premiums to ensure that their total book remains viable.

We are already seeing corporate, retail and industry superfunds make substantial increases to premiums – see the example below from an industry fund,

 

Cover Type Payout Amount Premium p.a. now Premium p.a.  after 1st August 2019 % increase
Life Cover $2,068,438 $1,551.33 $2,876.16 85%
Total & Permanent Disability $2,068,438 $1,572.01 $3,366.18 114%

 

The great concern is that for many people, insurance inside super remains out of sight and mind. These increases to insurance premiums must be duly considered and can no longer be ignored. MBS Insurance are our in-house insurance broking division and have access to every insurer in the market. We encourage all clients to conduct a review of their existing cover to ensure that it is both competitive and appropriate to their circumstances.

Simply send your PrimeAdvisory Accountant or Financial Advisor a copy of your latest super statement for MBS Insurance  to provide a one-page review for your peace of mind.

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