Upcoming Changes To Individual Income Protection Policies

Upcoming Changes To Individual Income Protection Policies

The Australian Prudential Regulation Authority (APRA) has continued its intervention into the Life Insurance industry due to heavy losses incurred from Income Protection policies.

Life insurers have lost a combined $3.4 billion over the past 5 years through the sale of Income Protection products to individuals. One major reinsurer indicating it was no longer prepared to reinsure Income Protection policies.

Effective from the 31 March 2020, APRA have imposed a capital requirement on all individual Income Protection providers. The capital requirement will remain in place until insurers can demonstrate they have taken the necessary steps to address APRA’s sustainability concerns.

From October 2021, further measures will be expected by APRA, including:

  • ensuring Income Protection benefits do not exceed the policyholder’s income at the time of claim – the ‘Indemnity Value’ pre-disability earnings definition will likely change to 12 months, rather than the best 12 months over the proceeding 3 years.  Pre-disability earnings (currently 75%) will be limited to 90% for the first 6 months and dropping to 70% thereafter.
  • avoiding offering Income Protection policies with fixed terms and conditions of more than five years – after 5 years, policies will likely be re-underwritten occupationally, financially and for hazardous past-times.
  • ensuring effective controls are in place to manage the risks associated with longer benefit periods.

In essence, the regulator does not wish for individuals to be any better off on claim than they were prior to claim. The current products on the market, with all their ancillary benefits and the ability to look back 3 years to find the best 12 months of earnings will cease to be available from October of this year.

The insurer AIA are one of the first to respond, launching a new product based on these principles called ‘Income Protection Core’. They are running both Income Protection products parallel to allow time for feedback from advisers and customers prior to the changes taking effect in October 2021.

So, if you do not have an existing Income Protection policy or are not sure if your existing Income Protection policy is right for you, please get in touch with us.

*Any information provided on this page should be considered a summary and general advice only. All information should be verified via the relevant Product Disclosure Statement (PDS).