COVID-19 could be nail in income protection insurance coffin

The COVID-19 pandemic could be the final catalyst to cease long-term income protection in its current form, both in retail and group markets, according to Rice Warner.

The research house’s latest analysis pointed to Australian Prudential and Regulation Authority (APRA) data on profit margins pre-pandemic that showed insurers, and reinsurers, were experiencing greater losses than ever.

In December, 2019, individual disability income insurance sum posted a net loss after tax of $1.5 billion – the largest loss compared to individual lump sum, group lump sum, and group disability income insurance.

Risk product net profit after tax

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Source: APRA

“For the 12 months to December 2019, risk products reported a combined after-tax loss of $1.3 billion. All risk products deteriorated with the only exception being the individual lump sum product,” Rice Warner said.

“In particular, individual disability income insurance (also known as income protection insurance) reported a substantial loss, primarily driven by the persistence of adverse claims experience.

“COVID-19 will deliver a further hard blow.”

It said there would be death disability claims directly from the virus, but the impact of a sudden spike in unemployment and a general economic downtown would swamp that impact. It noted that disability claim rates were directly correlated to unemployment.

“In addition, workers compensation claims in Australia are also closely correlated to unemployment. This arises from elevated stress around work performance and business continuity, existing conditions that were previously manageable becoming unmanageable, and a rise in mental health claims,” the analysis said.

“Insurers are also in a position where, due to COVID-19 and physical distancing requirements, they will have less ability to manage existing claims as they will need to relax requirements for existing claimants to prove their on-going incapacity to work.

“…There are of course fewer jobs for claimants to return to, which inevitably impacts the duration of claims and worsens experience.”

Rice Warner noted that when investments markets drop, advisers often turned their client conversations to insurance cover and while this was a positive in addressing underinsurance levels, customers would have questions around whether they will be covered specifically for pandemics.

“So far, insurers have strong messaging reassuring the community that any existing cover that has pandemic exclusions will not have them applied.  It may be more difficult to promise no pandemic exclusions on new cover given the potential for anti-selection,” it said.

“There would be also seem to be inevitable premium increases required across both retail and group markets, prompting the need to accelerate and perhaps scale up further product design changes.”