Developments in Personal Insurance

Updated May 19th 2021

David Campbell, Blueleaf Consulting

The personal insurance industry has undergone significant changes over the past few years.

With concerns over the industry’s ability to sustain itself after experiencing significant losses, in early 2020 APRA introduced a sustainability measure which mandated that Insurers can no longer offer ‘Agreed Value’ (AV) income protection policies.

An AV policy provides a guaranteed benefit at the time of claim.

For those policyholders whose income fluctuated, such as the self-employed, an AV policy could prove beneficial.

The alternative, and now the only option available, is an Indemnity policy, which requires that the policyholder have their income assessed at the time of claim, and the benefit paid out is based on this amount.

This can prove to be an issue for someone whose income changes year-to-year.

So what is the take out from this?

If you have an AV policy in force, we strongly suggest you do not cancel or change it without first discussing the consequences of doing so with your Adviser.

Given the increasing cost of premiums, it is understandable to consider cancelling or reducing cover. Depending on your circumstances, particularly income stability from year to year, an AV policy can be like gold and is irreplaceable once cancelled so get advice before acting.

Another significant change in the industry is the rapid increase in premium rates across all forms of insurance.

The rates of increase vary depending on the insurer and type of insurance – generally, the largest increases we have seen have been on Critical Illness and Income Protection policies. In fact, one insurer has increased their level, Agreed Value premiums (to age 65) by 72.5%! This is an extreme increase but gives you an idea of how much the established insurers are hurting.

A key reason for this increase is the Insurers attempt to recoup their losses from adverse claims experience. A flow on effect of these increasing premiums is naturally an increase in lapse rates – where people just do not pay their due premiums and let their policies lapse. A real shame after paying premiums for potentially many years prior.

We are finding that new entrants into the market are providing competitive premiums and terms.

Changing insurers will not be an option for everyone, as it does require going through the underwriting process, but it is worth asking for advice on your options if you have experienced a significant increase in premiums.

The catch cry for 2020 was the ability to be agile and ‘pivot’ to adapt to a changing world and this is what we are seeing in the world of personal insurance. Fortunately, there are some options to pivot to.