Recent increase in insurance premiums, why has this happened and what this means for you
Written and accurate as at: Jun 23, 2021 Current Stats & Facts
Introduction
Insurance provides cover in the event that the unforeseen were to occur. We insure our home, its contents, our cars, boats, caravans but most importantly we need to insure ourselves. People underestimate the financial and emotional turmoil which follows when someone passes away, is rendered permanently disabled or significantly injured or sick and unable to work.
This article discusses the recent increase in insurance premiums, why has this happened and what this means for you. We will also discuss an example of an insurance claim and how this relates to usual premium increases for other members.
At the conclusion of this article we will summarise the importance of insurance and the role that Finance Control plays in assisting you with your appropriate level of insurance.
Client and insurance policy information pertained in this article are fictional and an example of how insurance claims can affect premiums of other policy holders.
The recent increase in insurance premiums
Insurance customers in Australia have seen a rise in premiums recently, prompting the question of affordability and concern regarding adequacy of current cover.
In 2021 customers may receive a notice from their insurer via mail or email, informing that their insurance premiums are increasing. Insurance premiums are structured as either stepped or level premiums. Level premiums are more expensive initially however would remain relatively steady over the lifetime of the policy. Stepped premiums are structured to be cheaper initially and will increase each year over the lifetime of the policy. Stepped and level premium increases are based on a variety of factors as discussed in the next section titled ‘why has this happened’.
At Finance Control, we review your insurance cover and premiums during your annual review meeting to ensure the cover is appropriate and the premiums remain affordable.
Why has this happened
The Australian Prudential Regulation Authority (APRA) governs superannuation and insurance providers to ensure that the Australian public receive appropriate products and services to meet the growing needs of society. In completing a comprehensive review of insurers independently and via superannuation funds, APRA has recommended insurers to provide products that remain sustainable to provide long-term support for customers. This recommendation was made following APRA releasing their annual report for the quarter ending 30 September 2020 which saw an after-tax loss of $1.6 billion or $3.4 billion over the last 5 years for the Australian insurance industry.[1]
This after-tax loss for insurers is attributed mainly to the amount of capital they are required to pay to a successful insurance claim which can be as a result of death, total and permanent disability, critical illness or inability to work due to a significant injury or illness. Insurers will review policies periodically for level premium clients and annually for stepped premium clients and will apply premium increases.
Premium increases are based on a variety of factors including individual (indexation with CPI, current health and medical history), industry (insurance claim statistics) and broader economic factors (recession, global financial crisis & pandemics). Some factors are controllable by the customer such as improving health status, indexation options and stepped or level premiums while industry and broader economic factors are determined by the wider environment. Due to a continued rise in successful insurance claims and the duration of payment based on the policy structure, this has resulted in an increased cost for insurers providing cover to customers. This has resulted in the necessary increase to insurance premiums customers will experience in 2021.[2]
Income protection insurance policies specifically have incurred large premium increases, ranging from 15% to 38%[3]. This premium increase is not specific to one insurer, we are seeing this across the industry and is a result of a 10-year trend where insurers are experiencing large increases in claims and clients are remaining on claim (receiving regular payments) for a longer period of time[4].
What happened to Joe?
Take Joe, who is 43 years old, works in a factory and earns $50,000 p.a. Joe has an income protection policy which was established following advice from Finance Control to ensure that he is adequately protected. Joe understands that if he is unable to work for a significant period of time due to illness or injury as described in the insurers product disclosure statement, he may be able to claim on this policy to receive up to 75% of his gross annual salary paid until age 65 after serving a waiting period of 90 days.
During the peak of the COVID 19 pandemic, Joe was experiencing a lot of uncertainty with his employment, experienced a relationship breakdown and began to suffer depression. After a period of time off work Joe sought medical advice for his depression resulting in a diagnosis of Joe suffering from mental illness relating to depression and anxiety which meant he was unable to work. Joe subsequently made a successful claim on his income protection policy after serving his waiting period of 90 days and will receive $37,500 p.a. (75% of his gross annual salary) until the age of 65 so long that he remains incapable of working under a medical diagnosis.
In the above example, Joe claimed on his income protection policy as he was diagnosed by a medical professional as being unable to work. As Joe was successful in his income protection claim it is feasible to consider that the insurer would be required to pay Joe $37,500 p.a. for the remaining 22 years until Joe is age 65 as long as Joe continues to be medically unable to work. This will amount to a total loss for the insurer of $825,000.
Joe is one example of thousands of claims to insurers each year which result in increases in insurance premiums for other policy holders. As discussed earlier, one aspect insurers use to review premium increases is industry (insurance claim statistics). The more successful claims which are paid, the more premium rates can increase, similar to home, car and contents insurance.
What this means for you
Insurance is critical to ensure that you and your loved ones are protected in case the unforeseen were to occur. The trade-off is that premiums will continue to be adjusted over time subject to individual, industry and broader economic factors.
Over time, you may receive a notice via regular mail or email from your insurer confirming that your insurance premiums are adjusting. This notice will be sent to the policy owner usually 90 days prior to the anniversary date of your policy and is not sent to your adviser. Once received, this allows you adequate time to review the adjustment and speak to an adviser where necessary.
It is important to understand that insurance premium increases are occurring across the industry. In analysing your needs for insurance, rather than focusing only on cost, we focus on the features and benefits covered. Example features and benefits such as blue-collar occupations, female specific illness, needlestick cover for health professionals and terminal illness advancement/support benefits can result in a difference in pricing.
Your insurance premiums are captured as part of your cashflow discussion in your annual review meeting. We do this to ensure the cover value is appropriate and the premiums remain affordable. Where a change to your insurance is required we will compare your existing insurance to alternatives on our Approved Product List (APL). This APL allows us access to a range of insurers to compare the features and benefits which are important to you whilst seeking competitive pricing.
Reviewing this article will allow you to better understand the need for insurance premium adjustment over time. Any insurance recommended to you by Finance Control is provided to ensure that your needs, goals and objectives are adequately covered in the event that you may need to claim on insurance.
If you would like to discuss your insurance further, please contact Finance Control on (02) 4276 2557 to discuss your situation with an adviser.
[1] The Australian Prudential Regulation Authority (APRA). 2020. Quarterly Life Insurance Performance Statistics publication for the September 2020 quarter. Available from https://www.apra.gov.au/news-and-publications/apra-releases-life-insurance-statistics-for-september-2020
[2] MLC Insurance. 2021. Understanding premium changes. Available from https://www.mlcinsurance.com.au/premiumchanges
[3] Russell Cain .2021. Income protection premiums increase for 2020 and 2021. Available from https://www.lifeinsurancedirect.com.au/income-protection-premium-increase/
[4] Sue Houghton. 2021. Understanding changes to premiums in 2021. Available from https://www.bt.com.au/personal/insurance/support/premium-increases.html