Indemnity IDII appropriate for small businesses: APRA

Indemnity individual disability income insurance (IDII) should be an “appropriate” alternative for small business owners or self-employed individuals as agreed value contracts are no longer available, according to the Australian Prudential Regulation Authority (APRA).

In its answer to a question on notice by Liberal senator Slade Brockman on what APRA was doing to support small businesses that had been adversely impact by its changes to the IDII market, APRA said the product design of agreed value IDII had contributed to the “significant sustainability” issues.

“For agreed value IDII products, the sum insured is set at the time the policy is issued and then remains unchanged, regardless of subsequent changes to the insured’s income,” it said.

“This may result in the amount insured being very different to the customer’s insurance needs, potentially resulting in situations where the insured is better off financially being on claim, compared with prior to the claim event.

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“This sort of product design goes against the principles of sound insurance product design, and acts as a disincentive to sound ‘return to work’ strategies. It has contributed to the significant sustainability issues in the life insurance industry which have the potential to threaten the ongoing viability and availability of some types of insurance for the Australian community in the future.”

APRA said as agreed value contracts were no longer available, life companies could design IDII products with the necessary flexibility to meet the needs of non-salaried individuals

“Indemnity IDII products should be an appropriate alternative for small business owners or self-employed individuals as this sort of product takes into account the average income over an appropriate period of time immediately prior to the disability, reflecting the future earnings likely to be lost as a result of the disability,” it said.