The Actuaries Institute has called for urgent reform of Australia’s $5 billion disability income insurance (DII) sector, following the release of a KPMG report.
The institute-commissioned report found that DII does not adequately support a policyholder’s return to work in Australia’s modern economy, and acknowledged increased concerns about future access to affordable DII cover. It also identified the need for simpler products, a reduction of “bells and whistles,” a change to definitions, and a review of the benefits as critical to empowering those who can to return to better health as soon as possible.
Actuaries Institute also established a taskforce to identify where critical reform is needed. It will review the professional requirements for actuaries in the disability income insurance business.
“Modern life insurance provides valuable financial benefits for people who can’t earn an income due to injury or sickness,” said Ian Laughlin, of the institute’s disability insurance taskforce. “Australia has a very competitive market and customers have been offered a smorgasbord of product features. However, they have also been subjected to multiple unanticipated premium increases. A decline in insurance company profitability despite these steep premium hikes has called into question the sustainability of disability income insurance in its current form and suggests the potential for market failure.”
“Our research found that Australian workers tend to have higher payouts than their counterparts in comparable jurisdictions,” said Daniel Longden, KPMG actuarial and financial risk partner. “A replacement rate of 75% of earnings is quite common in Australia with up to 80% replacement ratios available. By contrast replacement rates in the US are generally 50-65% of income, and in the UK, 60-65% of income. In some circumstances, where an Australian policyholder has an income replacement ratio of 75%, the policy may typically permit more than 102% of pre-disability take-home pay. A high replacement ratio can be a disincentive to returning to work.”
In December, the Australian Prudential Regulation Authority reported that life companies had collectively lost around $3.4 billion over the past five years through the sale of DII to individuals. APRA’s Geoff Summerhayes also noted that life companies had kept premiums at unsustainably low levels and policy features were too generous.