The pace of change in Australia's income protection (IP) offering has gathered significant steam in recent years. For advisers who have been in the industry for a while now, you would have witnessed an increase in clients' awareness of IP and its benefits against a backdrop of significantly more commentary about the industry's sustainability.
Industry experts, like KPMG, have noted the profitability of the industry has been changing: "Retail disability income reported a loss of $368m (in 2017), making it a fourth consecutive year of losses."
This view of profitability is also being seen through changes at a pricing level. Rice Warner notes: "The industry has responded by ramping up premium rates by 30% or more."
Both of these experts have acknowledged the importance of a sustainable IP market and, as an adviser, this industry context is important to know. The long term sustainability of the insurance industry is critical to the nation's health.
Our clients aren't oblivious to the changes occurring and it's incumbent on both product providers and advisers to work through these changes with them and improve understanding.
This can happen by first, understanding the broader demographic, economic and social factors in which an IP product is developed and then second, understanding the specific dynamics of IP premium construction.
This article dedicates some time to the former and a follow-up piece will explore the premium construction dynamics in greater detail.
Over the past 10 or so years, we have seen some significant structural changes to the IP market and even more significant shifts in societal perceptions.
The acceptance of mental health as a mainstream economic narrative has been significant. Every year, an estimated four million Australians live with a mental illness and almost half of all Australian adults will experience a mental health condition in their lifetime. This illness disrupts wellbeing, personal relationships, careers and productivity.
Early intervention has shown to have significant, positive health outcomes and IP product providers have played a key conduit role to health professionals and support networks with this rehabilitation. Implementing strategies that provide focus and direction for the individual is critical and empowering them to make early decisions significantly reduces disability duration.
There is a much greater acceptance in talking about mental health, seeking help and developing intervention strategies. This means IP benefits are being put to work and that's driving a cost across the industry, but as a society, it's a good thing. Over time, it means costs will be brought to a single place (i.e. an insurer's P&L) and when costs sit in one place, national and targeted strategies between government, insurers and rehabilitation providers can be more effective.
At the same time, medical advancements, particularly in diagnosis, have improved significantly. Take for example, bowel cancer screening. The improvement in this diagnostic tool means we are now detecting cancer in phase 1 compared to phase 4, which means more Australians are living with cancer and insurance benefits are coming into play earlier in the cycle.
Both of these trends shows how the claims profile is increasing and changing. This is impacting industry pricing and sustainability and there is an equilibrium between these two dynamics currently being sought across the industry.
There are also important structural changes to understand and appreciate.
As consumers become more aware of their ability to claim, the historical design of the IP solution is coming under different pressures. The proliferation of definitions is one example. Many years ago, if you were receiving an IP benefit and you worked a little, that income would be offset against your benefit. Now, you can work up to 15 hours a week without any impact to your benefit.
These are strong and positive definition improvements. The product should avoid, where practical, financial penalties for those who make the effort to get back to wellness and to work. The balance, for the industry, is to make that benefit sustainable.
The general increase in competition across the industry is also driving a lot of this change. The technology evolution of comparator products, such as XPLAN, means the industry is much more aware of relative competiveness.
At the same time, insurers are working harder to deliver greater benefits direct to consumers. The introduction of initiatives such as mobile claims teams, where claims consultants are sent to remote areas to directly assist in expediting a claim, is one such example. Our Codes of Practice are also driving the industry to have greater interaction with customers, for very good reasons.
All these factors are contributing to the changing face of insurance and are important to understand. What these factors are driving is a vastly improved IP solution, which will support both our individual and nation's health. Understanding and explaining this industry evolution against a backdrop of improved benefits and claims experience will go a long way in providing clients the most critical benefit of all: peace of mind.