OWN TO ANY – THE CLOCK HAS TOCKED

Financial Newswire’s life/risk expert Col Fullagar writes that nearly three years after APRA intervened in the individual disability income market the consequences are still being felt.

On 1 October 2021, APRA stamped its authority and boot on individual disability income insurance (“IDII”) by requiring insurers to action the implementation of mandated changes to its contracts, including:

• The removal of Agreed Value from the market, leaving Indemnity as the only option;
• Shortening the calculation period for Pre-Disability Earnings to the average earnings in the 12 consecutive months immediately prior to the date of disability, and
• Changing the basis of the definition of total and partial disability from Own Occupation for the entire benefit period to Own Occupation for the first two years of benefit payment after which the assessment is made against Any Occupation the insured is suited by education, training and experience (“ETE”).

For those who started a new IDII policy on or around October 2021 and went on claim shortly thereafter, the impact of the first two was of course immediate.

For the last, however, initially it was like nothing had changed as claims were still being assessed on the insured’s ability to perform their Own Occupation, but the clock was ticking and now, for some claimants their clock has tocked because their two year Own Occupation benefit period has expired or is about to expire.

Insurers of course, knowing this day would inevitably arrive, have been diligently preparing well in advance; engaging in regular meetings together to discuss and document a sound, fair and consistent approach across the industry, and then informing advisers and clients alike what to expect and when. ……. sound of pigs flying overhead !!

As research for this article, a number of retail insurers were contacted and asked if they would be willing to contribute by way of responding to the question “In regard to the reassessment of an IDII disability definition from Own to Any Occupation  after two years, do you have a set process and, if so, are you able to share it on a confidential basis?”

My considerable thanks go to those who replied and whilst none was sufficiently comfortable to share their actual process, either because I could not be trusted (fair call) or they didn’t yet have a process, they were willing to pass on some valuable insights.

What follows is an amplification of their responses together with some silly additional thoughts from Moi. The reader is left to work out which is which.

1. When Should Reassessment Process Start?

A fair question to ask is when the reassessment process should start, with a fair answer beginning with it should start prior to the expiry of the two years of benefit payment. How much prior being the obvious follow-on question.

One approach would be to estimate the average time a reassessment might take, for example, three months. Then three months shy of the end of the two year Own Occupation benefit period, the insurer could send out a communique to claimants with a copy to the adviser letting them know the basis of the assessment of the claim will change on Date X. Said communique would also advise what information was needed to enable the claim to be reassessed and then a suggestion might be made that they would be well-advised to hot-foot it and get the guff in as the claim will otherwise end on Date X.

Whilst delightfully simple and straightforward, this One Size Fits All approach was universally rejected as not being appropriate by the insurers that made contact. Big tick !!

What was suggested by insurers was a variation on a theme of Individual Consideration with the only reasonable criticism of their approach being, dare it be said, consistency, or at least something broadly consistent across the market might have been nice especially for claimants and advisers ……. there go those flying pigs again !!

So, in answer to the question “When should the reassessment process start?” the answer is “It will depend on the individual circumstances of the claimant.”

2. Claimant Categorisation

At this point, a sincere apology must be made. The categorisation of claims and claimants in the context of this article is necessarily done in an impersonal and clinical way with the aim being to arrive at an outcome that will enable those on claim to be treated in as personal and empathetic way as possible. With this in mind, the indulgence of claimants and the reader is respectfully sought.

Income protection claims might be broadly categorised as:

• Claim duration highly unlikely to continue for two years

These are your relatively straightforward broken arm or leg; short term illness, minor musculoskeletal or similar claims. Never are and never will continue for more than a few short months at worst. What percentage of the whole these claims represent is unknown by any but the actuaries, but the end result is the same, they should only ever need to be assessed on an Own Occupation basis.

• Claim duration unlikely to, but may continue for more than two years

This group is trickier in that whilst the claim is unlikely to continue for two years, there is a chance it will and in fact it may continue for a little longer than two years.

The question for the insurer in regard to these claims becomes how much longer than the two years benefit payment period does a claim need to continue to warrant a reassessment being undertaken, for example, if the claim was due to end in two years and one day, or one week, or even one month what would be a reasonable course to take?

The insurer’s “tolerance” is the additional period of claim time during which the insurer would be willing to take a more flexible approach bearing in mind the period of tolerance may grow shorter the larger the benefit amount if for no other reasons than the involvement of a less tolerant reinsurer. Bearing this in mind, “tolerance” might be measured by a dollar limit rather than a time limit.

When cases such as the above are identified, there would appear to be merit in the insurer engaging in a discourse with the claimant and/or the adviser as soon as possible in advance of the expiry of the two years to alert them to what is coming up and the somewhat unique circumstance of the claim BUT then, in a shock move, the insurer might actually add meaning to the discourse by enabling some inclusiveness in the decision-making process.

A few related thoughts:

• If the claim circumstance is within the insurer’s tolerance, one approach might be that payment would simply continue on the same basis as before?
• If the claim circumstance falls slightly outside the insurer’s tolerance but the excess does not warrant the time, cost and inconvenience of a full-on, comprehensive reassessment, there might be merit in the insurer having available an abbreviated and simplified process?
• As an alternate to the previous, a negotiated settlement might be undertaken with the claimant being given the choice of bypassing any reassessment process in exchange for receiving an agreed, final payout amount?

Following on from the above, the insurer may need to advise the claimant that, if a recurrent claim ensued, an ETE assessment would form part of the recurrent claim assessment. This might even include the provision for a benefit clawback from the recurrent claim proceeds if an overpayment had earlier been made.

• Totally and Permanently ETE Disabled

A third claimant category will be those who are clearly totally and permanently disabled on an ETE basis.

The realisation of this circumstance may arise out of the acceptance of an Any Occupation TPD claim with the insurer that holds the IDII cover, or it may even arise out of the claimant providing relevant documentation from a different insurer that has accepted an ETE TPD claim. An assessment of the other insurer’s documentation by the IDII insurer could result in the IDII claim continuing without any further proofs being required.

In the absence of an ETE TPD claim, the nature of the claim condition may be such that the IDII insurer requires little more than a short report from the treating doctor to confirm the position.

3. Swiss Cheese Principle

As before, a one size fits all approach should not apply with individual consideration being the preferred approach. The pragmatic issue with the latter is of course, it can be very labour intensive.

Enter the Swiss Cheese Principle which is designed to reduce the size of a large task by poking holes in it.

Put another way, the size of the reassessment process for an insurer’s entire portfolio of affected claims can be reduced by identifying claimant categories that are relatively easy to assess, and then establish a process to handle them separately. Thus, if there are 100 claims needing to be reassessed and removing the claimant categories identified above and equivalent others that can be identified, leaves only 30 claims, the task of dealing with those 30 becomes exponentially easier.

4. Remaining Claim Category

If the Swiss Cheese Principle is applied, the remaining claim category might become:

• Claims for which the duration or cost is likely to be for a period in excess of the insurer’s tolerance; and
• For which the outcome of the ETE assessment is unclear to the extent that a full reassessment process is considered necessary.

Somewhat ironically, for this category individual consideration may be better giving way to a one size fits all standard approach with the insurer needing to decide:

• When to raise the subject of reassessment with the claimant and/or the adviser;
• How to raise the subject ie the manner of communication and the content of that communication;
• What relevant information already exists within the claim file a review of which may reduce the need for additional information;
• What additional claim proofs may be required, for example one or more than one of an ETE Questionnaire, an independent medical examination (“IME”), an employability assessment, factual interview, financials, etc; and
• What the reassessment process will look like and its expected duration.

For these claims, transparency will be even more important in order to avoid the perception of a drip-feed reassessment process.

There is little worse than, for example, an ETE Questionnaire being requested. In the absence of any advice to the contrary, the claimant and/or adviser believe this to be the only requirement and provide same. But then advice arrives that an IME is required. This is attended to after which there is a request for something else, and so it goes on.

5. Reassessment Outcomes

There is a temptation to represent the outcome of the reassessment process as either the claimant will satisfy the ETE definition, and the claim will continue unchanged or the ETE definition will not be met and the claim will end.

Whilst the above certainly are possible outcomes, there are others, including:

• The claim will move from an Own Occupation total disability basis to an Any Occupation partial disability basis with earnings being deemed if the claimant is not working;
• The claim may oscillate between total Own and partial Any by virtue of the changing impact of the manifesting symptoms, for example, the claim condition going in and out of remission;
• The insurer may use its discretionary powers to require the claimant to undertake rehabilitation and/or retraining “to its satisfaction” as a pre-requisite for the claim continuing,
• The claimant may not agree with the insurer’s assessment and a dispute ensues.

No doubt there will be other outcomes foreseen and unforeseen including the realisation that the reassessment process will not only occur once at the two year mark but may in fact continue for the remainder of the claim duration.

6. Benefit Payments

An important matter that has not yet been considered is what happens to benefit payments if the reassessment process extends beyond the two-year mark?

The response from insurers tended towards “it depends”.

If the claimant has been fully compliant during the reassessment process and delays have arisen out of the actions of the insurer and/or third parties such as treating doctors or service providers, then the claimant should not be prejudiced BUT, in the alternative ………….

One thing is certain, the role of the adviser will be essential to assist the claimant to both understand and manage whatever process unfolds. If necessary, that role could also extend to proactively suggesting to an insurer that it consider strategies within this article or others that may be appropriate.

Col Fullagar is the principal of Integrity Resolutions Pty Ltd