Income protection insurance – from bad to worse

Specialist Financial Newswire life/risk columnist, Col Fullagar writes that where income protection insurance is concerned, things have gone from bad to worse.

1. APRA’s Wind of Change

In May 2019, APRA announced its findings from Phase 2 of the “thematic review of individual disability income insurance (“IDII”)”. The IDII world as we knew it was about to change.

APRA set out its expectations of insurers and noted that “addressing these expectations will be critical to enhancing the sustainability of the market for individual IDII.”

“APRA identified several factors that are impeding life companies’ ability to improve the performance and sustainability of individual IDII. To address these factors, APRA has listed four themes (thus “thematic review”) …. where greater attention and action are needed by life companies.”

 The identified themes were:

• Strategy and risk governance

Essentially, due to past failures in these arears, the insurance company Board needed to implement long-term strategies to address individual sustainability issues and Management had to make the strategies happen.

Or, if you prefer, “The Board and Management were expected to start doing what they were, in part, paid to do”

• Data

“APRA observed that the quality, quantity and timeliness of data used in the management of individual IDII are poor …..

• Necessary data are unavailable;

• Data used are inconsistent or inappropriate;

• Data analysis is conducted within business function ‘silos’ with no feedback to other relevant areas in the business.”

Or, if you prefer, “The Rubbish in – Rubbish out Strategy needed to change”.

• Resourcing

“The complex nature of individual IDII products requires support from adequately skilled and experienced staff.”

APRA “ …. observed that some (insurers) have not adjusted resourcing to keep pace with the increased level of workload and complexity. This has resulted in inadequate resourcing and staff expertise in key functions such as risk, data management and analytics, claims handling and actuarial.” (Writer’s emphasis)

Or, if you prefer “Are you serious !!!”

• Pricing and product design

“APRA is concerned that product design and pricing decisions MAY be contrary to the long-term interests of policyholders ….. Pricing and product development and design are crucial components of the value chain for individual DII ….. APRA considers that poorly formed pricing and product development and design decisions MAY have exacerbated the risks life companies are exposed to with their individual DII portfolios.”

The language used in detailing the above failings warrants comment in so far that the first three are presented as fact whereas the last is couched in terms of rumour and innuendo ie “may”. Yet it is the last of these that has received all “the Press” since May 2019

The question is begged “Are the first three matters receiving equally robust attention and focus from APRA albeit without the spotlight of media scrutiny?”

The reader is left to respond to the question in their own, cynically fueled way.

Fast forward to last Thursday when APRA expressed disappointment at the (yet another) failure of life insurers to address issues with individual disability income insurance. Coming out of APRA’s disappointment was a decision to suspend some of its mandated changes for a couple of years.

Many may have breathed a sigh of relief as they see this providing a portal, enabling both advisers and insurers to draw breath and catch up with what has happened to date. If this is your preferred position, please stop reading now and enjoy the sweet naiveite of Youth.

For those remaining – Health Warning – proceed only if you are in ruddy good health and/or you are compliant with the advice of, and medicine prescribed by, your treating medical practitioner ie proceeding to read could endanger your health.

The problem is this; whilst some of APRA’s mandated changes are being deferred, the ones that have been implemented DO NOT represent the main, material changes that have been made to IDII over the last couple of years nor do they come anywhere near to being the main threat to the IDII industry – insurers, insureds, claimants and advisers – in the short, medium and long term.

Yes, agreed value policies have given way to indemnity, the averaging period for pre-disability earnings has been reduced, as has the period of Own Occupation that applies when on claim. These, and others, are without question very significant changes BUT the advice process can cope with them because, in large part, the changes are objectively based.

What the advice process cannot handle is the infusion of IDII policies, fully at the behest of insurers, with what will be termed insurer discretionary powers and, following on from this, the impact of these infusions on claims management and the claimant.

2. Insurer Discretionary Powers

There are at least eight different discretionary powers existing to a greater or lesser extent in each of the new range of IDII policies currently available:

• The insurer can insist that a claimant undertake rehabilitation and/or occupational retraining and this must be done “to the satisfaction” of the insurer.
• So-called capacity clauses are back with a vengeance. This one area contains three separate discretionary powers. First, is the claimant capable of working or, if working, are they working to their capacity? Second, if not working to capacity, to what extent is there a shortfall and, Third, if there was no shortfall, what additional earnings would be generated.

To add insult to injury, or sickness, if the claimant is suffering from a claim condition which has a variable impact, which of course many do, then the above discretionary power has to be exercised and assessed on a monthly basis. As Marko once foolishly said …. “Good Luck”

• After a set period, e.g. two years, Own Occupation gives way to Any Occupation the claimant could undertake based on their training, education and experience (“ETE”), If ETE work is unavailable or cannot be obtained, refer to capacity clause above
• ETE Occupations include those for which the claimant was required to undergo rehabilitation and/or retraining “to the satisfaction” of the insurer. If work is unavailable or cannot be obtained …….. you guessed it.
• One insurer has the ability to alter the claim conditions if it assesses there has been a change in “employment status” between policy start date and claim start date.
• And, finally a couple of insurers place a contractual obligation on the claimant to “mitigate the severity and longevity of claim”. What this means and how it might manifest is a fair question which, no doubt would receive anything but a fair answer if posed to the particular insurers. The bottom line is, a perceived failure to so mitigate could impact the claim in unstated and therefore, unknown ways.

Some discretionary powers exist with some insurers but not others and whilst some insurers contracts may have numerically the same number as others, the discretionary powers that make-up that number may differ.

3. The Power of Discretion

The reason the presence of insurer discretionary powers is arguably of greater significance to an intending insured than the APRA mandated changes is that, as above, whilst the latter are largely objectively based and thus facilitate an advice process that enables an informed client decision, the former are subjectively based and, as such, only enable an informed decision to the extent they are, or are not, present.

Coming out of this, there would appear to be compelling merit for the adviser to make known to the intending insured, within the relevant advice document, the presence of insurer discretionary powers, the specific nature of those powers in the recommended contracts and the potential impact of those powers at the time of claim.

One final piece of scare-icing on the cake ………

You may have wondered why the following text was highlighted in (iii) Resourcing, above:

“This has resulted in inadequate resourcing and staff expertise in key functions such as risk, data management and analytics, claims handling and actuarial.”

The reason is this, if there was inadequate resourcing and staff expertise to manage the more generous, albeit more financially dangerous, IDII policy terms that previously existed way back in May 2019, what has changed such that there is now sufficient in numbers and expertise resources to manage the clearly more complex APRA mandated changes AND crucially, the above insurer discretionary powers.

The answer is likely “Nothing”.

By way of a simple and very recent example; last week, a claim manager, no less, appeared to take umbrage at the fact the writer did not take the call of an assessor so that a verbal claim update ahead of a confirmatory email, could be provided. The fact the call was unannounced, and the caller’s number was “unknown” did not appease “We see value in being able to communicate a decision via phone and our practice is always to do this via phone in the first instance and follow up with a letter outlining the reasoning”

As sweetly intentioned as this may appear to be, it effectively represents Claim Colonialism ie we know what’s best for you, so you just sit there and let us tell you what we are going to do to you and why. Heaven help the claimant facing off to this in the areas of insurer discretionary powers.

4. Protection Against the Power

The extent to which there is, or is not, protection available to the claimant and their adviser, lies in the response to questions such as those set out below:

• What has the insurer done to increase and improve resourcing since May 2019, apart of course, from poaching claims assessors from other insurers which arguably achieves nothing.
• What actions, if any, of the claimant might trigger the requesting of additional information relevant to the discretionary assessment.
• What additional information might be requested to enable the discretionary assessment.
• What qualifications will an assessor need in order to undertake discretionary assessments, and what testing will be undertaken to ensure the presence of these qualifications prior to the letting loose of the assessor on the claimant World.
• What safeguards and/or protocols will be put in place to protect the reasonable rights of the claimant; and, if you said Internal Dispute Resolution, go immediately to your room and forget about supper !!!

Lastly but most crucially, one more question needs to be asked “To what extent do the current tranche of assessors possess both the aptitude and attitude to handle these new discretionary powers in a way that will enhance the claimant experience and the reputation of the financial services industry”

Of course, the above may simply be over-excited, scare mongering bearing in mind the assessment of the APRA Deputy Chair (Financial Newswire, 22 February 2022 – “APRA can control life insurers but not advice client”) who noted, amongst many notable notes, that the “ ….newer product ….. has different terms and conditions that are slightly less generous but are stably priced and sustainable going forward ….”

Words of little comfort if, as it might reasonably be expected, the infusion of insurer discretionary powers leads to a further rending asunder of the claimant and the claimant experience.

Col Fullagar is the Principal of Integrity Resolutions Pty Ltd