APRA's Insurance Changes: Everything You Need To Know

General

In recent weeks, we’ve received a number of enquiries from members of the My Wealth Solutions community about correspondence you may have received from your insurance provider about recent changes that have been implemented.

This correspondence, and the changes they detail, are the result of recommendations made by APRA (the Australian Prudential Regulatory Authority) designed to correct the currently unsustainable nature of the insurance industry as a whole. While APRA’s recommendation have had a ripple effect across the entire insurance industry, the government authority has specifically cracked down on income protection policies.

As your team of financial experts, we thought we would break down exactly what APRA’s recommend changes are to the income protection industry and how they may impact on you.

This guide to the 2021 income protection insurance changes covers:

Why is the insurance industry changing?

Since its beginnings in Australia over 30 years ago, the income protection industry has grown into a multi-billion dollar generating sector. However, due to the competitive nature of the industry, in recent years the features and benefits of income protection policies have grown to the point where the claims paid out are consistently exceeding the premiums received.

In fact, APRA announced that the income protection departments of Australian Life Insurers have lost approximately 4.3 billion dollars over the last 5 years – making the industry consistently unsustainable.

As a result, APRA has stepped in in an attempt to regulate the market and help it become sustainable into the future. However, the measures that APRA has chosen to implement may have negative consequences for you if you currently have an income protection policy or intend to take one out in the future.

While some changes have already been put into effect, such as the discontinuing of agreed value income protection policies on the 31st of March, another round of changes is due to be implemented on July 1st 2021 with all changes to be finalised by October 1st 2021.

But what exactly are APRA’s changes to income protection policies and how may they affect you?

Keep reading for our breakdown of the changes, both proposed and implemented.

Or, if you’d like advice regarding these changes in relation to your own particular financial circumstance, please don’t hesitate to contact us and a member of our financial advice team will be happy to help.

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How will I be affected?

While there are number of changes that may have not yet been implemented when it comes to income protection policies, it is not a stretch to say that by October 1st 2021 life insurers in Australia will be offering significantly less generous income protection policies to consumers.

The key changes that APRA has recommended be put into effect include:

The discontinuing of agreed value policies

We touched on it before, but this is one of the biggest changes that APRA has made to the insurance industry.

Previously, income protection policyholders were able to lock away an agreed value of the monthly benefit paid at the signing of the policy. This was extremely beneficial to those who were self-employed or worked as freelancers, as if the policyholders’ income changed down the track they would still receive the agreed amount even though their income may have decreased.

As of the 31st March 2021, the monthly benefit of the insurance policy will be based on the policyholder’s actual income at the time they make a claim, or the best year of earnings in any three years prior for some insurers, as an agreed value is no longer available.

Changing the renewable period to a maximum of 5 years

Prior to APRA’s changes, many income protection policies offered a guaranteed renewal for life. From October 1st 2021, income protection policies can only be held for a maximum of 5 years. After this 5 year period is up, a new policy must be entered into that reflects the current markets terms and conditions.

When a policyholder enters a new contract, medical underwriting won’t be required but any changes to the policyholder’s occupation, financial circumstances and any dangerous occupations or hobbies must be updated and reflected in the new policy. Even if your circumstances are exactly the same after five years, insurers won’t be able to extend your current policy.

Limitations on the income replacement ratio

Following their assessment of the insurance industry as a whole, APRA expressed concern that the current income replacement ratios, in combination with certain product features and benefits, may leave claimants earning more than they would if they returned to full-time work.

In order to curb this side-effect of the current system, and encourage claimants to return to work when they are able, APRA has announced the following changes to policy contract terms which will go into effect on October 1st 2021:

  • Benefits will be capped at 90% of earnings at the time of claim for six months and 70% after the 6 month period
  • Indexation at the level of CPI is permitted
  • Where income at risk excludes superannuation, SGC can be paid in addition to the 90% or 70% cap. If income at risk includes superannuation, the cap applies to income inclusive of SGC super
  • There will be no cap on monthly benefits

Redefining how ‘income at the time of claim’ is calculated

For policyholders with fluctuating incomes, such as those who work on a contract basis or are self-employed, the income at the time of claim will be based on your actual earnings, not your agreed earnings as agreed value policies are now prohibited.

For those of you with a stable income, pre-disability income will now be calculated based upon the income at risk at the time of claim or within the last 12 months. For those with variable incomes, income risk will be based on average annual earnings over a period of time appropriate for the occupation of the policyholder and reflective of future earnings lost as a result of the disability.

This flexibility is designed to cover those on maternity or unpaid parental leave who may experience a fluctuation in their earnings.

Requiring stricter disability definitions

Finally, APRA has required that policies with long benefit periods require a stricter definition of disability. From October 1st 2021, a more explicit definition of disability will need to be established as some policyholders may be able to return to employment even though it may not come under the definition of your ‘normal job’.

With this change, APRA aims to reduce the number of claimants who may be able to return to some paid employment but don’t as they continue to qualify for a monthly benefit under their agreed policy. However, there are concerns that some policyholders may be forced to return to work before they are ready due to the stricter disability definitions.

What should my next steps be?

Okay, so now you understand just how exactly APRA’s recommendations are changing the income protection industry and the products they can offer, you may be beginning to worry about how your personal financial situation could be affected.

Remember: it’s important at times like this not to panic and make impulsive decisions. While these changes are taking place across the board, bringing with them an increase in premiums for some, there are still options available to you.

As your team of financial experts, we’re here to help you assess your current cover compared to other options currently available on the market and ensure your cover remains competitive. However, as the insurance industry as a whole is changing to become more sustainable, we may also need to examine other ways we can bring your premiums back to a level you are comfortable with. This could be done through measures like reducing your level of cover or extending your waiting periods.

If you don’t currently hold an income protection policy but were considering it as an option for the future, it may be wise to consider taking out cover before all of APRA’s recommendations are implemented on October 1st 2021. The My Wealth Solutions team can help you here too, by reviewing your current financial circumstances and identifying which options may be suited to your particular financial needs and goals.

Want to know more about how you can tackle these changes in relation to your financial world?

We’re always here to help.

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