Insurance costs still on the rise - Will it ever end?

The start of 2022 looks set to see insurance premiums keep rising as they have in previous years. Measures that began in March 2020 to stem losses have started to take effect but premiums are still increasing. I've been writing about this for years now, if you want to see the progression that got us here please check out the insights page and keep an eye out for Hyperlinks.

We are still in the midst of significant change with October 2022 being yet another, and potentially final, stage of APRAs intervention. If you didn’t catch the detail, insurers lost approx. 3.4 billion on Income protection in the 5 years prior to 2020, this was due to a combination of low interest rates, less advisers providing insurance advice and higher costs driven by claims and legislative compliance.

To address this, the regulator stepped in with the following broad guidelines for insurers:

• Insurers must ensure IP benefits do not exceed the policyholder’s income at the time of claim, and cease the sale of Agreed Value policies;

• Insurers must avoid offering IP policies with fixed terms and conditions of more than five years; and

• Insurers must ensure effective controls are in place to manage the risks associated with longer benefit periods.

Insurance is something that astute individuals recognise they are unlikely to claim on but are not yet in a position to self insure (you have enough invested to maintain your desired standard of living) so they have an insurer cover this risk for them. So unless you do actually make a claim it’s likely to be wasted money if you don’t count the intangible peace of mind it often gives us. For younger people just getting started in their careers the previous understanding that an insurer would be able to cost effectively cover you throughout your entire career appears to now be false. So for those of us who are considering getting cover or have it and are getting whacked with premiums increases next year, what are your options and how to you make the pieces fit your unique needs?

Background and disclosures

The vast majority of our clients are young Doctors that are generally in good health but usually have put themselves through a few investigations etc in the past (often out of curiosity) which makes the underwriting process tricky. Though we have been working in financial planning for many years we have spend the last half decade learning our client needs very well and refining our process and offering to suit our chosen clients exactly.

We spend a lot of time working with insurers, industry groups and even politicians to advocate for our clients. We strongly believe in fee for service as we want to ensure that we are only ever paid by the clients we advocate for and not product providers that simply produce the products that we use. This is not to say that we are at crossed purposes with insurers. They want to provide their clients with cover that protects them at a time they need it for a reasonable cost with a reasonable profit and so do we. If we acted against that common interest we would not be serving our clients. Although we do demonstrate the differences we prefer not to accept commissions or any other payments from any source. I think an insurer did give us a box of cherries for xmas last year though.

We offer holistic planning and seek out opportunities to reduce cost relentlessly. Insurance is often a key part of the planning process but we also consider investment goals over the medium and short term as part of this strategy. Most people have a finite surplus income so reducing insurance cover means more money to pay off non deductible debt and build an investment portfolio. Our goal is always to identify and solve problems. Insurance products, investment managers and superannuation funds are all simply the tools we use to solve problems. As these tools change we have to change the way we use them.

But what do I do about my premium doubling this year?!?!?!

Your adviser needs to match your insurance products with your needs. Prior to Sep 30th last year, Income Protection products were all very similar and other than a few minor differences you could probably not go too wrong just comparing based on price. Post October 1st you can no longer buy cover as generous as you previously could and insurers have taken a very diverse approach to APRAs guidelines to make these products sustainable. How these new products interplay with one another is still largely untested at this early stage.

Your adviser should help you work through these options and how they are relevant to you specifically but generally speaking here are a few options that reduce premiums:

• Waiting period

  Can you survive for 2 or even 3 months on your savings and sick/ long service leave? changing from a 30 to 90 day waiting period often reduces premium by approx. 30%.

• Benefit period

  Are you getting toward self insured? Reducing from an age 65 benefit reduces premiums significantly and this is the primary focus of recent premiums rises. This is something that should be used with caution as while reducing waiting period as above might have you lose a month or 2 benefit, reducing your waiting period could have you losing out on decades on benefit. Hence the focus of the premium rises.

• Bells and whistles

  Do you have day 1 accident cover or other premium features? Much like the waiting period above these might provide immediate benefits that were important when you started the policy and were living pay check to pay check but not now you have a good buffer account and can self insurer over the short term.

• Move from a Level to stepped premium

  This is a tough one as when you paid a level premium you essentially averaged your premium until age 65 etc. Stepped premiums increase as your age does while level does not. Both types are still subject to other factors that increase premiums and we are seeing the results of this now. If you have been paying a higher amount for years are you still below the stepped premium which will increase at a faster rate? or did you just start 2 years ago and have already had a doubled premium? Stepped in mid 30s is often half the premium of a level structure. Once you switch to stepped from level the benefit of that additional payment evaporates.

• Remove/rebate commissions

  This is uncommon for most advisers but something we do every other day at NOR. Most insurance policies come with an ongoing payment to your adviser of 10-30%. Some insurers allow you to remove or rebate this which decreased your premium accordingly. Of course you would need to then pay your adviser for service when you need/want it so you need to weigh this up. This varies by insurers and product type and depends on how it was set up. We favour this as we can reduce cost with no loss of benefit and one of the few “magic wands” we have at our disposal when we are trying to manage high premiums.

Lets make no mistake, clients don’t want to pay high premiums yet insurers have to make sure they have enough to pay claims. This means less investment in this space and blown out timeframes across the industry simple alterations can take months where previously we would see this take days. Clients and their advisers as well as insurers are feeling this pain right now and we are seeing lay offs and budgets tightening across all stakeholders. APRA had to intervene or risk collapse of an entire industry. This would mean bad outcomes for many who have invested in cover for years and may have health concerns that while not yet claimable may be in future and would lose cover completely. Insurers that don’t meet these new guidelines are fined significantly though some have chosen to be quite liberal in their interpretation. This could be considered as an attempt to increase market share but we expect a push and pull as IP products homogenise over the next few years. So, even though its hard to swallow, all we know is that if you have cover in place its more generous than anything available to replace it with, so what is that difference worth to you?

As a specialised adviser in this field I have always asked clients to reflect on what they really NEED. We aren’t looking to cover them for as much as is humanly possible, just enough to reasonably meet their needs in as many scenarios as possible. This varies by every person and changes over time. As advisers we are just here to help you hope for the best and plan for the worst, as the world at large and your situation changes we adjust our strategy to suit. The only thing we can ever be sure of is that we will do our best to work in your best interest.