Cost of income protection cover jumps

Insurers blame issues in Oz market for problems with providing policies

Insurers have hiked the cost of income protection insurance and tightened the qualifying criteria in the last six months making it tougher to get cover. Tim Fairbrother, a financial adviser who specialises in insurance, said across the industry there had been an increase of around 10 per cent for income protection but some insurers had hiked the price by as much as 15 per cent while for others it was 5 per cent.

Income protection insurance provides a payout if you lose your ability to earn based on illness or an injury. Redundancy cover is a separate policy that people take out to cover their income if they get made redundant.

Policy price increases are based on individual cover and also typically rise as a person ages unless they agree at the start to level the premiums until a certain age.

Fairbrother said it had got a lot tougher to get cover in the last six months.

“It has been really really difficult to get people income protection over the last six months or so.”

Some insurers had stopped providing agreed value cover, where the parties agree on an income level when the policy is underwritten, to self- employed people, he said.

In some cases he had been unable to get income protection cover at all for his clients, resorting to using other types of insurance instead.

But rather than Covid being to blame advisers say problems in the

Australian income protection market have been the drivers for the increase.

Fairbrother said he was told by an insurer in February that it was concerned about the Australian market and the fact the product there had become unsustainable after a rising number of claims driven by mental health- related claims.

At an industry conference held online this week by the Financial Service Council insurance underwriter Swiss Re warned that New Zealand insurers also needed to make changes.

Kimberley Robinson, product solutions leader at Swiss Re in Australia, said Australian regulator APRA had intervened after big losses in the sector which added up to around A$ 3 billion ($ 3.2b) over five years.

“We have suffered losses on individual income protection on an unsustainable level.”

Robinson said factors contributing to those losses included an increasing focus on sales volumes over profitability, cross- subsidisation of the product and a fiercely competitive market. “In some cases we were providing customers with more benefit on claim than they earned before claiming.”

The industry had also come under immense pressure from the media and regulators since 2016 and there had also been high turnover of senior managers in the sector.

Sam Fortey, also from Swiss Re, said New Zealand insurers had not faced the same intensity of pressure.

“But they have definitely still been present and they seem to be on the increase.”

In New Zealand life insurers have come under fire from both the Reserve Bank and Financial Markets Authority through a conduct and culture review.

The Government is in the process of changing the law to enable the FMA to license and police the sector’s conduct.

Robinson said APRA had said insurers had partially created the problem by having poor data and at an anecdotal level market data was also difficult to obtain for New Zealand. “Insurers tell us their data could do with some work.”

Robinson said one thing that was consistent in both countries was that a decrease in the 10- year government bond rates over the last 10 years had directly increased premiums by 20 per cent.

“We have also seen claims incidents and durations rise whilst terminations deteriorate. We have seen pressures increase on ACC and naturally that puts more pressure on the private sector.”

She said it also appeared that some customers could receive a higher benefit than the loss of income by the customer.

“I’ve also heard some people comment that New Zealand is different because the Reserve Bank has no product intervention powers but it i s worth noting their powers are not dissimilar to the Australian market regulator and both are able to impose a capital charge.”

The RBNZ is considering increasing capital requirements for the insurance sector.

Fortey said some insurers in New Zealand made losses on the product but it was not known what the situation was in aggregate across the industry.

The Financial Services Council, which represents the insurance industry, has recently set up a CEO life insurance forum.

Richard Klipin, FSC CEO, said at its first meeting issues like sustainability of the sector and supporting New Zealand consumers was the number one topic. “They . . . go hand and hand.”

He said he couldn’t comment on individual pricing decisions by insurers but the sector was facing challenges.

“At a headline level the insurance sector is not growing. It is going sideways — it is flat. And so our biggest challenge — and this is not just income protection — is a question of making insurance relevant, affordable and accessible to all New Zealanders who need it.”

Some consumers have questioned the price rise given the current recessionary environment.

Klipin said Covid has been a really tough time for all New Zealanders. “All of us have had to prioritise what we spend money on.”

But he said insurers had to take a long- term view in order to be around in both the short and longer term to be able to deliver on the promise of cover.

“. . . the coincidence is unfortunate but it will differ for every person because everyone has their own unique contract.”

We have suffered losses on individual income protection on an unsustainable level. Kimberley Robinson, Swiss Re Australia