Those that know me and have read what I write know I get pretty hot under the collar about things that impact peoples outcomes. Australia is about to career down the path of something that is going to punt us back to the dark ages when it comes to looking after people.
Australian Prudential Regulation Authority (APRA) has decided that income protection is unsustainable, and it needs to be regulated to be more sustainable. Understand this is from a profitability and shareholder return perspective, not what is good for the consumer or the Australian public.
The Australian Insurance Watch article here discusses the Australian changes in more detail, which I won't repeat.
What I want to talk about is the impact here that this change will drive.
Income protection insurance is supported by reinsurance. Another insurer, or group of insurers, that stand behind your insurer to share the cost when there is a claim.
This reinsurance in Australia is pretty much the same reinsurance we have here in New Zealand. So we are likely to see the changes regulated by APRA on the Australian insurers flow to their reinsurers. By association, those reinsurers will inflict the changes on our New Zealand insurers. Primarily because we are a much smaller market and they don't like to have to manage what will be vast differences.
So what am I going on about?
Simply speaking; the removal of benefit offerings that protect everyday Kiwi's when they come to grief with a disability.
And before you say, but there's ACC? ACC is a step above social support, aka the job seeker benefit, but still falls way short when it comes to what income protection can provide.
What we are talking about here is the removal of cover security in the form of agreed levels of cover value, and the limitation of payment terms to 5 years.
Many of you that have got this far will be saying so what?
- And for a lot of people, this isn't going to be a significant impact on their claim experience.
- If you are a PAYE employee, it makes little difference if you have agreed or indemnity cover at the point of claim, if you are a PAYE employee at the point of claim. More on this in a second.
- If you are one of the 95% of disability claimants, you will be back to work in 5 years. So the term limit won't necessarily be a problem either.
However, when we start to look at what happens in the real world with claims and claims management, this approach falls apart very quickly.
For argument's sake:
Because the numbers are easier, let's say you are aged 40 and paid $100,000 per annum in your job, employed or self-employed, doesn't matter at this point.
- You take out the policy with a 75% level of replacement cover, so $75,000 per annum subject to tax.
- A few years pass and you find yourself in a situation where your health is being impacted, but not enough to really be a problem, so you change jobs to something that pays $75,000 per annum or maybe go self-employed with an idea you've for a year or two.
- Then you have an event that results in you not being able to work.
- The idea of the income protection you have is to maintain the level of lifestyle you had when you took the cover.
- Now given that you are insured for $75,000, and you earn $75,000, you have a problem. You can only claim 75% of the lost income, $56,250 per annum.
Now you can say that's rubbish, and I would agree, except that is the contract you have. It covers the loss experienced at claim time up to the level of coverage, not the cover you are insured for if you earn less.
My present answer to this problem is advise you to have Agreed Value coverage; however, with the new Australian rules, they are taking this away. Which means you have this rubbish outcome.
Let's look at it another way.
- You're insured for the same $75,000, and you have an event that puts you off work. You have some time off work, but you don't fully recover.
- Your claim is at $75,000, which is ok and you recover enough to return to work.
- But not at the level you were able to work in the past. We'll use the same numbers, as before, at $75,000 of earnings going forward from here.
- You sit with this for a few years and then have another event that puts you off work, this time they only pay you $56,250, because the income you were earning was less after the first claim.
Ok, rubbish again.
- Now let's stop for a second and consider that this event prevents you from ever returning to work again, either in your own occupation prior to disability, or to another one that you are suited to through education, training or experience.
- We started at 40; you've had two claims and three years in-between, let's say you are now 48.
- So you cover is going to pay you $56,250 per annum for five years from the start of the second claim, being generous with the cover term resetting after the first claim.
- So at age 53, you are now facing a life with no income protection because it is limited to five years, and there is no other support available.
- You're looking at the $391 per week married with kids to pay the bills with. That's about $24,500 per annum.
- Quite a drop from $56,250 and the $75,000 you started with.
- Now at 48, given that the average family's eldest child is about age 19:
- How are you going to pay the bills for school?
- How do you pay the mortgage, other household expenses?
- And how do you do this from Age 48 to age 65, 17 years of basic minimum income?
You pay your premium for your cover, so you and your family are protected.
- So you can maintain your lifestyle.
- So you can live with dignity when you can't work to earn an income.
The net effect of these changes in Australia may improve the bottom line of insurance companies, at the expense of the social mandate that insurers have of protecting your lifestyle with products that are suitable to your needs.
Income is a core support of your lifestyle; having the ability to effectively insure it removed from you, is not security.
It is not dignified, and it is very much harmful to you and your family.
- A competitive market with Agreed Value products that protect Kiwis throughout their working life.
- Corporate greed is not a reason to take this away from you.
If you have an issue with this, please make your voice heard by contacting the following and making your point that products driven by Australia politics for Australian profits are not welcome in New Zealand.
If these people and organisations do not hear from you about what is important to you, they won't fight this.
To contact APRA, this is their contact page https://www.apra.gov.au/contact-us
For our Financial Markets Authority https://www.fma.govt.nz/contact/
For MBIE https://www.mbie.govt.nz/about/contact-us/
For your local MP's https://www.parliament.nz/en/mps-and-electorates/members-of-parliament/
For your insurers that provide income protection products
Asteron Life https://www.asteronlife.co.nz/contact.html
Fidelity Life https://www.fidelitylife.co.nz/customer-experience/contact-us/
Partners Life https://www.partnerslife.co.nz/contact-us