If you have been following our newsletters over the past 18 months, you will know we have taken a strong interest in trying to anticipate changes to the market in order to continue to provide our clients – and yours – with the most timely and insightful advice possible. It is no secret that the life insurance sector is under financial pressure. But the scale of industry losses is worth taking a moment of consideration, as are the regulator’s and the industry’s mitigating responses. APRA’s Quarterly life insurance performance highlights statistics to March 2020 (released 28 May 2020) is sobering reading. It paints a picture of an industry already under pressure and struggling to stay upright then having the carpet pulled out from under it by the COVID-19 pandemic. Here are a couple of paragraphs that illustrate this view:
Annual performance: The industry reported a net loss after tax of $1.8 billion for the 12 months to Mar-20, compared to a profit of $759 million in the 12 months to Mar-19. This significant deterioration was caused by poor results in both the December and March quarters driven by the poor investment results owing to COVID-19. Quarterly performance: The current COVID-19 global pandemic has had a substantial impact on quarterly performance, particularly on investment revenue. Total entity net loss after tax was $980.3million for the Mar-20 quarter, which continues the poor result from the previous quarter, with a loss of $1.05billion. Of the $980.3million loss for the March quarter, $191.3million is contributed by risk products, with the remaining loss generated by a number of other product groups.
Last year, we saw APRA intervene in the income protection insurance market to force insurers to improve the economic sustainability of their companies and products, which has already seen the cessation of availability of Agreed Value Income Protection (IP) products. This same intervention, with effect from 1 July 2021, will limit policy contract terms to five years. So, while a policyholder may have a policy offering benefits payable until the successful claimant turns 65-years-of-age, the term of the contract itself will only be five years ‒ renewable every five years. For all existing policyholders, who took out their policy prior to 1 July 2021, their terms and benefits are protected. The terms of an existing policy cannot be altered without the policyholders’ consent. Of course, none of this is “new” news to those of us in this industry. What is new are the recent reports of spikes in mental health related income protection insurance claims as a result of COVID-19. Headlines such as this one; 'Looming crisis': Insurers brace for surge in mental health claims, are not uncommon in recent weeks. This particular article that appeared in Nine Entertainment’s major metropolitan newspaper mastheads, such as The Age and Sydney Morning Herald, in late July was reporting on commentary during the Financial Services Council’s Life Insurance Summit 2020. In this piece, Sean McCormack, MLC Life’s then acting CEO and Managing Director, is attributed as saying that dealing with mental health was one of the most significant issues facing the insurance sector as COVID-19 had accelerated an already growing number of claims related to psychological health. Somewhat unsettlingly, the article also reports that Senator Jane Hume had floated the idea of replacing total and permanent disability insurance (TPD) lump sum payments with paid treatment plans. Senator Hume is reported as describing mental health as a "looming crisis" for the life insurance industry and also saying the Federal Government is alert to the issues and "open-minded" about ideas for reform. Another article in the Australian Financial Review had the headline: Life insurers brace for surge in mental health claims.
This piece by Aleks Vickovich, led with the following: The life insurance industry is preparing for an onslaught of mental health-related income protection, trauma and disability claims from consumers hit hard by the coronavirus-induced economic downturn and social isolation. Vickovich went on to say these latest commercial impacts are merely compounding the commercial woes of an already “troubled industry” which has faced “plummeting profits.” Why raise these issues here? Well, first of all, we feel it is important to remember that the fundamental reason insurers are in the economic position they are is because they have been paying out on the vast majority of claims. For clients taking out insurance as a means of managing financial risk, they should be reassured to know that almost 100% of claims are paid, especially if an adviser assisted them in putting the policy in place. Increased premiums are not about hiking profits. They are about economic sustainability at a time when the regulator is pushing insurers to be more economically conservative. Secondly, when such issues are considered in the context of:
the commentary from a range of life insurance company CEO’s in Mike Taylor of Money Management’s recent excellent piece; LIF, life and tough times for insurers,
The Actuaries Institute’s analysis of the impacts of COVID-19 on the life insurance sector
APRA’s late July “Letter to all insurers: Capital management” in which it provided an updated guidance on capital management to insurers with the aim of ensuring
“insurers remain able to fulfil their role in providing insurance coverage and supporting their customers through a difficult period…”
‒ then to us at AFRM it becomes clear we need to be thinking about how we best flag and explain to our clients that significant change is coming to the life insurance market. While a number of the CEO’s quoted in Mike Taylor’s piece say they are looking for alternatives other than simply increasing premiums, we believe the fact remains that significant annual increases in premiums are here to stay for the foreseeable future. We also believe that insurers will likely become less generous – or should we say “more conservative” - in their product offerings to minimise the amounts they are required to pay out when honouring claims. How then do we continue to justify to our clients – and yours – why investing in various life insurance products continues to remain a viable and valuable means of protecting themselves from future financial risks? We’d be delighted to hear from any of our respected referral partners if you have views on what messages might be best to relay to our clients. For us, looking beyond fluctuations in investment markets affecting short-term industry performance, we are leaning towards highlighting a couple of key points. Again, insurers pay out on the vast majority of claims, especially if an adviser assisted them in putting the policy in place. Increased premiums are about ensuring economic sustainability at a time when the regulator is pushing insurers to be more economically conservative. In such a context it would be fair to say many insurance products have been under-priced historically and the market is now going through a correction. Significant change is coming. In our view the warning signs are there for anyone to see. The likelihood is that new life insurance products of the future will be less generous in terms of the benefits provided to the policyholder than they are today. And almost certainly, the premiums will be higher than they are today. In this context, it only makes sense to ensure our collective clients review their current financial risk management plans as soon as possible to ensure they have the most appropriate and best possible terms locked in place now – before the market changes. Sincerely, Rob Vitnell Acting Managing Director AFRM
Case Study
“It’s a fact that with old contracts, there are times when the insurer’s own claim managers do not understand how the contracts work.
“They simply default to interpretations based upon current policy definitions, which may be disadvantageous to the client on claim.”
The relationships AFRM has with our mutual and other clients are long-term – often for decades.
A case in point is Ben [name changed to protect client privacy].
Ben first became a client of AFRM back in the early 2000s when he was in his early 30s. He had an equally young wife and a one-year-old child.
Ben was a highly qualified young professional working in the mining survey field. His role routinely required him to go on scientific field expeditions to remote parts of the country. He was a very fit and active sportsman, so roughing it in the outback was no great challenge.
For years now, AFRM’s slogan has been:
“Protecting your tomorrow today.”
Those words are incredibly apt for this case study.
AFRM co-founder and recently retired Managing Director, Nick Hatherly, reviewed Ben and his young family’s circumstances and provided recommendations on a financial risk management strategy in late 2007, after a referral from his accountant.
By mid-2008, Ben had two insurance policies in place:
Income Protection (IP) that would provide about $3,000 per month through to the age of 65.
Term Life with Total and Permanent Disability (TPD) and Trauma cover: with benefit of approximately $200,000 in the event of his death; $100,000 in the event of TPD and Trauma. Significantly, thanks to AFRM’s advice, Ben had “Own Occupation” TPD cover.
The financial future looked rosy for this young family.
Then one day in December 2008 as Ben was driving in traffic, totally out of the blue, the car he was driving was ‘T-Boned’ by an unlicensed driver in an unregistered car.
Ben suffered catastrophic injuries to the right side of his body including a shattered pelvis and brain injury.
So severe were his injuries that Ben was put into an induced coma for weeks and remained in hospital for about six months.
To this day, some 12 years later, Ben continues to be on the IP claim filed on his behalf by AFRM.
Throughout this period, AFRM adviser, Phil Hatherly, has continued to work on Ben’s claim as his situation has evolved and ongoing negotiations were required with the relevant insurer. Following, we will attempt to summarise what has actually been years of intermittent negotiations.
Following the accident, when Ben finally got back to work, he was suffering chronic pain, memory loss and impaired freedom of movement that rendered him unable to perform at his pre-accident level. He started slowly – a day and a half a week then gradually moved up to 20 hours a week.
For the next three years Ben tried to maintain his original work role, including the rough field trips which became absolute hell.
As he was now working part time, his IP claim was on a Partial Disability basis, the benefit based upon the loss of income compared to what he was earning before the accident.
Ben eventually accepted he simply was not capable of performing his original role in the same way as he could prior to his accident, so he resigned to take up an office-bound role at significantly lower pay.
AFRM successfully negotiated with the insurer to continue to pay Ben’s Partial Disability claim benefits on the grounds that the change of job was driven by Ben’s medical and physical impairment caused by the car accident.
A year or so later, 2012/13, the relationship with the insurers became challenging yet again when Ben finally received a modest personal injury compensation payment under the NSW Compulsory Third Party (CTP) scheme.
The delay in payment had been caused by the CTP insurer handling Ben’s claim repeatedly challenging Ben’s level of permanent injury caused by the accident, even though Ben had ultimately had to have a hip replacement and had an overwhelming weight of supporting medical evidence stating his impairment was permanent and was caused by the accident.
AFRM was not involved in that process but did get involved to advocate on Ben’s behalf when his IP insurer advised its intention to ‘claw back’ a significant amount of Ben’s IP claim payments.
The insurer’s argument was based on an “offset clause” they maintained was in Ben’s contract that allegedly stated any lump sum compensation for loss of income would be treated as income received over a set period, hence it would be offset against IP benefit payments paid by the insurer.
AFRM’s Phil Hatherly successfully argued on Ben’s behalf that the original policy document issued in 2008 had no such offset clause in it. The clause had in fact been introduced in later versions of IP insurance product.
This successful negotiation by AFRM took months to settle but the insurer finally accepted this, and no claw back occurred.
Ben has since been classed as a “permanent long-term claim” meaning the burden of providing documented medical evidence of his impairment on a monthly basis was eased dramatically and his Partial Disability claim benefits continue to this day - 12 years later.
AFRM’s, Phil Hatherly, said our company’s long-term knowledge and experience sometimes gives it an edge when negotiating with insurers.
“Ben’s story is a testament to our skills of long-term claim management,” Phil said.
“It’s a fact that with old contracts, there are times when the insurer’s own claim managers do not understand how the contracts work. They simply default to interpretations based upon current policy definitions, which may be disadvantageous to the client on claim.”
Thanks to AFRM’s advocacy on Ben’s behalf, he enjoyed a smooth transition of his claim through a change of occupation, an unsuccessful attempt by the insurer to claw back benefit payments in the wake of a CTP compensation payment, and a transition to long-term claim status resulting in a significant reduction of ongoing medical documentation requirements.
That’s how willing AFRM is to stand by your clients and protect their best interests for the long-term.
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