Disability income: time for a rethink?

RGA Australia recently conducted a wide-ranging review of disability income claims files. We looked at claims management, underwriting and policy wording to ascertain what issues, if any, are evident in the system.

Our top-level assessment of claims is that, yes, disability income (DI) policies are working, at least for the way they are written, but there are still issues that need addressing.

A much richer and complex set of underlying sector issues go to the heart of affordability for consumers and the long-term viability of the sector.

In light of these issues, we have to pause and ask ourselves, “Is the DI industry writing the right policies, or, perhaps more seriously, writing policies it can’t sustain?”

Almost certainly on current forecasts, the future is not looking too good. According to leading actuarial consultancy Rice Warner, DI premiums will further increase. Products are also likely to undergo fundamental redesign. All of this in order to maintain some semblance of long-term affordability.

Serving a genuine need

Nobody can argue that disability income insurance does not serve a vital community need. According to Australian Prudential Regulation Authority (APRA) data, some $8 Billion* is paid annually to claimants in this country alone.

Underneath the headline claims figure, however, the industry would do well to ask itself some further fundamental questions:

- Are insureds paying too much for too many product features they don’t actually need?
- Has the long-term trend to design ever more ‘bells and whistles’ come at the cost of the industry’s capacity to provide even basic ‘belts and braces’ needed by insured customers at claim time?
- Is it time to take a step back to re-engage with the original intent of disability income insurance and to see if those purposeful goals are actually being met, especially for the insured?

The sustainability of insurance products in this vital segment is under scrutiny for good reason. Customers are paying for ‘extra’ benefits that may very well reward them financially at claim time. But does this meet a genuine financial need?

A general view is that insureds ‘buy and get what they pay for’ and customers are willing to pay for additional financial benefits afforded by today’s comprehensive policies. The irony, however, is that continued pressure on premiums – in turn increasing lapse rates and reducing market penetration – means more people who need cover are less likely to receive it.

It’s also worth noting that while all customers pay the extra premiums for these additional benefits, the majority will never go on to claim them.

Solution time?

The average retail disability income premium increased by 9 per cent between 2013 and 2014 (above and beyond age increases) and the average group premium increased by 19 per cent during the same period, according to data from Rice Warner.

The truth is, these increases have likely been insufficient, which means there are more hikes to come.

As a re-insurer, RGA has seen incidence rates from 2013 to 2015 increase by 21 per cent over what they were from 2004 to 2008. During the same period, terminations decreased by 8 per cent – and the trend-line is not good. While individual company results certainly vary, it’s an industry-wide issue as publicly available APRA statistics and the KMPG Disability Study both show.

Given these scenarios, the industry should perhaps also ask itself whether customers would be better off taking a good-quality ‘basic’ DI product, and redeploying premium savings towards improving their overall personal financial position.

Positive change

Changes can be a fundamental positive and need not be seen as draconian. While starting again with new products makes sense in the long term, after reviewing claims files, RGA believes there are modest, common sense changes that would provide improvements as the industry makes a transition to alternative product solutions.

Though it will take some time for such changes to influence claims results, there are a number of adjustments that can be made with minimal or no market impact, as well as some new benefits that would materially improve the ability to manage claims as they begin to flow through.

For example, changes that focus on compliance, rehabilitation and retraining would have no or very limited impact on systems, and could be managed within product disclosure statements and policy documentation only, making them easily implementable.

They would also open the dialogue and thought process about what better products for all parties might look like in the future.

Collaborative effort

The focus must shift from one of proving or disproving disability to one where the insured, his or her medical advisers and the insurance company are working together to get the insured back to health and back to work. Products must support, encourage and facilitate this approach both in their language and in their features and benefits.

Products would ideally satisfy a real financial need, and the insured must have a reasonable degree of responsibility for his or her progress and recovery. The focus should not be on what insureds cannot do, but what they can do and what support they need to recover and get back to normal working life.

This new way of thinking about products and how to help insureds should involve not just insurance professionals, but also financial advisers, medical professionals and the general public.

While the paradigm won’t change overnight, the discussion can begin now. It is not just about improving the financial outcomes for insurers but seeking to benefit the average policyholder, both in their hip pocket and in the event they have the misfortune to file a claim.

*Source: APRA Quarterly Life Insurance Statistics, March 2016. Includes lump sum as well as Disability payments.

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Meredith Barnes is head of underwriting and technical Services at RGA Australia.