Change comes at financial planners from a number of different angles. This month’s knowIT technical blog looks at APRA’s instruction to insurers to abandon agreed-value income protection policies, as well as the subsequent changes APRA wants implemented on July 1 of next year.
Letters and numbers
Last December, APRA wrote to all life insurers, requiring that insurers make major changes to new income protection policies from March 31, 2020. While a surprising and somewhat unprecedented move, APRA’s concern over insurers wearing major losses on this type of insurance should not come as a shock.
So, what has APRA requested insurers do?
Agree to dis-agree(d)
APRA has stated that they expect insurers to no longer offer agreed value income protection policies from March 31, 2020. Any income protection claim on a new policy from that date will rely on income not older than 12 months before the date of claim.
A simplified marketplace
The question of whether a currently uninsured client would be better suited to an agreed-value or indemnity income protection policy will be gone. Issues around agreed-value policies in super and whether they fully meet the temporary incapacity condition of release (and, indeed, whether the premiums are fully deductible), will also slowly disappear as grandfathered policies end and indemnity policies predominate.
Other pseudo-income protection insurance types may also be altered. Business expense and living expense insurance is usually issued as a monthly, income protection-style, benefit. Currently, the business expenses and living expenses are often established at the time of underwriting only. Under APRA’s new rules, such a policy could only be written if the business expenses were verified in the 12 months prior to the claim.
An unintended consequence
The 12-month income verification period may cause some unintended consequences for the insured. For those with irregular income, a major bonus or income spike may come after the date of claim, and hence be excluded from the income verification period. This issue may capture a wide range of people, from farmers to members of a sales force.
Additional changes from July 1, 2021
The 75 per cent ceiling
APRA has also stated that it expects insurers to limit income protection benefit amounts from July 1, 2021. New policies written from that date will not be permitted to pay more than 100 per cent of earnings for the first 6 months of claim, and 75 per cent of earnings thereafter (up to a maximum of $30,000 per month).
No guarantee of renewal
APRA will require insurers to limit contract terms on income protection policies from July 1, 2021 as well. Initial contract terms will be limited to five years, with those insured able to renew the contract for a period not exceeding a further five years on updated terms offered by the insurer.
Limit on long benefit periods
While less prescriptive, APRA also states in their letter that they expect insurers to put in place controls to limit long benefit periods on income protection policies from July 1, 2021.
Advisers need to keep up-to-date with insurers’ terms
The only way to manage these reforms is for advisers to stay up-to-date with insurers’ changing contract terms, particularly around the key dates of March 31, 2020 and July 1, 2021. One of the difficulties in managing this change is that APRA’s letter is not legislation, nor is it currently in the form of a regulator policy, and detailed issues will need to be addressed by the regulator themselves. How APRA communicates its opinion on these detailed issues will be key to informing clients and advisers about the changes.
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