The cost of income protection cover policies is on the up, here’s why
Insurance companies are hiking the costs of income protection insurance and are making it tougher to get cover in the wake of major financial losses on the same offering in Australia. Across the Tasman, a situation where consumers being “price-forced” to cancel their policies led the Australian regulator to ban insurers from offering policies which would replace more than 70 per cent of policyholders’ incomes, should they be forced to make a claim. The Aussie regulator concluded such high income replacement ratios meant policyholders, especially ones with significant investment wealth, had little incentive to work again, and stayed “on claim” for as long as they could, driving up claims costs, which were passed on as premium-rises to other policyholders.
What is income protection? Income insurance protects your most important asset – your income. If you’re unable to work due to illness or injury, you’ll receive payments to replace your income.
Won’t ACC cover me? In the event of an accident, you'll usually be covered by ACC. However, ACC only covers injuries from accidents, whereas income protection cover ensures you are protected in the event of illness and injury.
Australian insurers were making such big losses on income protection, the regulator concluded they had miscalculated the risks of issuing their policies and intervened in the market by ordering the insurers to hold more capital. The Australian regulator also banned the sale of “agreed value” policies where self-employed policyholders could choose the level of payments they would get, if they were unable to work, Kimberley Robinson, product solutions leader at reinsurer Swiss Re told insurers at the conference.
The affordability of these policies has been big news across the Tasman, with the industry under “immense pressure” from the Australian media and regulators, which has also led to high manager turnover in the sector.
What about in New Zealand?
In many financial areas, NZ follows Australia’s lead. Though over recent years, the NZ financial services industry has fortunately not experienced the same level of widespread and significant issues seen in Australia.
Despite this, we’re still hearing of increases of 10-15 percent for many NZ income protection policies.
There are a few more fascinating things at play here:
Over recent years, NZ insurers have come under fire from both of the NZ regulators (the Reserve Bank and Financial Markets Authority), most notably in a conduct and culture review. Even if NZ has not had the same level of issues that Australia has, our government is in the process of changing the law to improve policing of the sector’s conduct.
In both NZ and Australia, a decrease in interest rates over the last 10 years has directly increased premiums (the annual cost of cover) by a full 20 percent.
Some NZ insurers have reported making losses on income protection insurance – which isn’t a good sign for a healthy and sustainable insurance market!
The NZ personal insurance sector is going sideways – not growing – despite growth in NZ’s population and distinct growth in household debt. Even if the population wasn’t growing, the growth in household debt, such as mortgages, should mean more insurance is needed to protect families against events, such as health issues, which make repaying debt difficult.
Figures from the Financial Services Council show that only 20 percent of Kiwi’s have considered the risk of lost income due to illness – which is covered by this type of insurance.
Unless you’re particularly close to retirement, or retired already, your income is probably your most important asset. Protecting it should be your highest priority. Even if the cost of this is not getting any cheaper, it is still more than worth it.
If you’d like to discuss anything in this article, including having a chat about whether you and your family has appropriate cover in place – including checking you’re not wasting money on insurance -it would be our pleasure to assist.