AFA News 9 October 2020. On 30 September 2020, APRA issued their Final Individual Disability Income Insurance Sustainability Measures directions to the life insurers. This document follows an earlier release from APRA in December 2019 and a consultation process with stakeholders. It sets out the changes required by APRA to the Income Protection market, in addition to the removal of agreed value that came into effect from 1 April 2020. These additional changes are scheduled to come into force from 1 October 2021. This update broadly reflects the December 2019 draft version, however it includes some additional flexibility and other changes.
The key points are as follows:
Definition of Pre-Disability Income
- For people with predominantly stable incomes, APRA expects pre-disability income to be based upon income at risk at the time of claim or within the last 12 months. Importantly, for other people, APRA have said “for policyholders with an income that is variable, the income at risk is to 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 is not prescriptive, and it most probably provides room for the insurers to show flexibility. It seems clear that this flexibility would cover people on maternity leave or unpaid parental leave.
Income Replacement Ratio Caps
- Benefits are to be limited to 90% of pre-disability income for the first 6 months and then 70% from that point onwards. This is reduced from 100% and 75%, as proposed in December 2019. Indexation at the level of CPI is permitted. There is some provision for payments to third parties as part of rehabilitation. Where income at risk excludes superannuation, SGC can be paid in addition to the 90%/70% cap. Otherwise, these caps apply to income inclusive of SGC super. There is no cap on monthly benefits (as opposed to the $30,000 cap proposed in the December 2019 draft).
Policy Contract Term – Maximum 5 years
- IDII contracts are for a limit of 5 years, and at that point need to be refreshed to reflect the current market terms and conditions. Medical underwriting is not required at the time of the new contract, however changes to the policyholder’s occupation, financial circumstances and dangerous pastimes should be updated on renewal and reflected in the new policy terms and conditions. APRA has been clear that after five years it will be a new contract, rather than a variation to the existing contract. On this basis, arguably, a new upfront commission could be justified, however we are seeking clarity on this issue.
Benefit Period – Risk Control Measures
- There is a requirement to have controls in place to manage the risks of long benefit periods, however there are no prescriptive measures, like a reduction in the benefit payment cap or change of terms and conditions after a set period of time. This section will depend upon what the life insurers choose to do.
The life insurers will now need to design their new products and advisers will need to wait to see how the life insurers respond.
This reform will fundamentally change the IDII market and the risk adviser proposition. Life insurers and financial advisers will be required to adapt and seek opportunities in this new model. One outcome may be the need for more regular reviews with clients and the compulsory full contractual review of IDII business every five years.
There remains many areas of uncertainty including comparing old versus new products, what areas insurers have discretion on and whether the 5 year limit constitutes a new contract for commission purposes. We will continue to engage with APRA, ASIC and the insurers to play an important role in seeking to facilitate common sense outcomes.
Please provide any feedback on the Final Individual Disability Income Insurance Sustainability Measures to email@example.com.
Issued 09.10.2020. AFA Policy & Education Update