Changes to Income Protection aim to improve sustainability but what are the impacts to your policy?

17 February 2021

Following an industry review that started in 2019 followed by further industry consultation, the Australian Prudential Regulatory Authority (APRA) has announced changes to Income Protection (IP) products that will come into effect on 1 October 2021.

The changes have been introduced to provide parameters for insurers to develop more sustainable and affordable products and will see insurers setting their own sustainable IP products and terms using the guidelines from the Actuaries Association, IDII guides.

In January 2021, AIA Australia was the first to release an update to their Income Protection Core product in line with APRA’s announced changes and we expect other insurers to follow shortly.

The key changes to Income Protection products

Agreed Value

From 31 March 2020, insurers must cease offering income protection products with ‘Agreed Value’ terms to new customers. Agreed Value policies use the insured person’s income at the time of application, effectively locking in a monthly benefit amount irrespective of whether the insured person is still earning the same income at the time they make a claim.

Income at risk

Under the changes, product benefits will be required to better reflect the claimant’s income at the time of claim. For stable income holders, this means only income earned in the 12 months prior to the claim will be referenced. People with variable income, such as self-employed and contract workers, will have earnings averaged over a period of time appropriate for the occupation of the policy holder and reflective of future earning lost as a result of the disability.

Contract terms

Contract terms will be limited to five years with provisions made for the policyholder to enter a new contract based on updated terms and conditions at that time with no medical review. Changes in occupation, financial circumstances and dangerous pastimes will still be considered.

Replacement ratio

The replacement ratio will be limited to a maximum of 90% of the income at risk for the first six months of benefits, and 70% thereafter. Indexation will be limited to inflation rates and an allowance for superannuation contributions into a super fund will be included. Recognising their importance, the costs of rehabilitation and retraining will also be allowed but must be paid directly to the providers (and with regard to regulations).

Benefit term

No limits to benefit terms will be imposed but companies must set benchmarks and have effective controls to manage the risks from longer benefit terms.

No maximum benefit set

The maximum benefit set will be at the discretion of the insurer and is likely to continue to follow the current tapered approach.

The impact of changes to Income Protection products

Leading up to and following 1 October 2021, guidelines will vary from insurer to insurer in both terms and conditions and release date. Additionally, APRA has introduced a capital charge to insurers, which will be increased or decreased based on APRA’s assessment of their progress at addressing sustainability issues.

While existing in-force policies are guaranteed to retain their current terms and will not be impacted, we expect to see insurers increase their premiums in line to reduce their capital charge.

Considering these changes, it’s a good time to review your income protection policy to make sure what’s in place is still appropriate for your needs. If you require assistance or would like more information on any of the changes slated for Income Protection products, get in contact with the Findex Risk Insurance team.