2020 didn’t really start off on the right foot. With COVID-19 affecting communities, organisations, and industries around the world, the income protection industry was one for change. Especially with regards to the laws that govern it. Here are the 2020 APRA changes to income protection in Australia you should be aware of.
Why is APRA making these changes?
In late 2019, The Australian Prudential Regulation Authority (APRA), the regulator for life insurers, announced an intervention into the life insurance and income protection industry.
The announcement came following the individual disability income insurance (IDII) industry’s collective loss of $3.4 billion over the past five years. For that reason, the APRA took action to stabilise the industry. The APRA proposed several new measures that require insurers to address policy design and pricing.
With new measures in place, the APRA expects an improvement in the income protection market’s overall commercial viability. The APRA expects significant changes to occur with a new set of measures in place. They went on to discuss changes put forward for the industry, referring to” excessively generous features and terms that, in some cases, provide a financial disincentive for policyholders to return to work”. However, the measures will mainly affect new policies and those taking out increased levels of cover.
What are the new changes to income protection?
A series of changes to income protection has been outlined by the APRA. As of March 31, Agreed Value income protection won’t be available for new policies. For income protection, Agreed Value refers to locking the monthly insurance benefit without having to prove what the income is at the time of the claim. This is especially relevant for self-employed individuals whose annual income may fluctuate. Agreed Value policies will often offer higher security.
Retail income protection policies issued after March 21 will be impacted by the new measures, primarily due to the fact that the ARPA proposed a ban on Agreed Value benefits policies. The APRA took in feedback until February 29, with implementation taking place by the end of the financial year (June, 30).
It’s important to note that the changes focus primarily for retail policies, and not policies correlated with superannuation.
By July 2021, insurers will no longer offer certain benefits. Therefore, the two largest changes planned include:
- Policies will not be “guaranteed renewable”. Therefore, insurers will have to revise the terms and conditions of policies every five years. This also means re-assessment of incomes and occupations will have to take place.
- Long-term benefit policies will have certain measures in place to control ongoing claims. This includes a stricter disability definition for prolonged benefit periods. The changes will implement a new tier of definitions for individuals to meet. This will allow individuals to extend their claim time-frame. If individuals don’t meet the disability criteria, they will have to find work before they’re ready.
- Re-assessment of incomes and occupations will take place every 5 years! This will be effective July 2021
An end to agreed value policies
The APRA stated, “With effect from 31 March 2020, APRA expects that life companies discontinue writing IDII contracts where insurance benefits are not based on income at the time of claim, including agreed value (and endorsed agreed value) contracts.” This contract ensures a borrowed amount is based on individuals incomes upon applying, instead of when the claim is made. However, some insurance providers believe this new policy may potentially discourage claimants from maintaining job security. The APRA further commented on the change, announcing “it’s imperative that claim payments should be linked to income at risk at the time of claim.”
“This gives rise to moral hazard, heightens risk and impedes sustainability”, the APRA stated.
Annual earnings protection policy changes
Similar to the changes to income protection, the APRA will set new income protection policies in place. Those policies will strictly link to the annual income earned coming up to the claim. Consumers who change to a lower income will not be able to make the claim based on their previous income.
The APRA announced, “With effect from 1 July 2021, APRA expects that income at risk for all new IDII contracts be based on annual earning at the time of claim, not older than 12 months”.
Unfortunately, with the new change in place, individuals facing temporary downturns within 12 months may receive a lower payout.
Benefits restrictions for the first six months
New policies set by the APRA restrict benefits to full incomes within the first six months of claims. The APRA stated, “With effect from 1 July 2021, new IDII contracts will be designed so that insurance benefits do not exceed 100 percent of earnings at the time of the claim for the first six months of the claim, taking account of all benefits paid under IDII product as well as other sources of earned income.
Insurance providers believe this new policy may encourage individuals to return to work in the first six months of disability. They also believe individuals may attempt to retrain for other roles.
Payments’ coverage cap exceeding six months
The new policy limits the client’s coverage cap for payments. If an individual is unable to work, their insurance benefits may limit to 75% of their earnings. They announced, “With effect from 1 July 2021, new IDII contracts will be designed so that after the initial six months, insurance benefits are limited to 75 percent of earnings at the time of claim”.
Maximum benefit allowance
The APRA introduced a new maximum benefit payment policy. The new policy restricts payments to $30,000 a month ($360,000 a year). This applies to all clients, including clients earning more than that amount at the time of the claim. The APRA believes this new policy may encourage individuals with high-incomes to insure.
Only policies five years and under
With new policies in place, the APRA stated, “With effect from 1 July 2021, APRA expects that life companies will only offer IDII contracts where: the initial contract is for a term not exceeding 5 years”. This new change ensures all income protection insurance contracts are up-to-date with clients’ circumstances. This refers to the term and conditions along with external circumstances which may include medical advancements.
Ability to renew contracts without medical underwriting
The new change set by the APRA allows clients to renew their contracts without providing medical underwriting. They stated, “With effect from 1 July 2021, APRA expects that life companies will only offer new IDII contracts where: there is a right for the policy owner to elect to renew the contract for further periods (not exceeding 5 years) without a medical review on the terms and conditions applicable to new contracts that are then on offer by the life company. Changes to occupation and financial circumstances should be considered on renewal”. Although individuals will have the ability to renew without medical, their income and occupation may still be reviewed before renewal. This change may ensure all policy features are appropriate for clients.
Will there be more changes?
The APRA are introducing other changes including increased scrutiny on prolonged benefit periods and increased industry data that are up-to-date. As new changes come into effect, make sure to keep an eye on their site for any new announcements.
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