Finding a Way Forward for Disability Income Insurance in Australia - Is IDII Functioning Sustainably Elsewhere? [Part 3 of series]
The need to overhaul the IDII market in Australia is clear, but how are other well-developed markets faring? To try and answer that question, and to put Australia’s situation in perspective, we spoke to colleagues in the US, the UK and South Africa.
The news from the U.S. is that insurers had to learn the hard way. From the 1980s to early 1990s the market was very competitive, leading to lower premiums, higher issue limits, lifetime benefits and overall generous policies. Products were designed to meet customer expectations, and many of those customers felt they were entitled to benefits, irrespective of whether they met the policy terms. Claim decisions were frequently challenged even though they were legitimately well-founded decisions.
One trend, which resulted in significant losses for insurers, stemmed from the health insurance industry’s move toward managed care and subsequent changes to the way doctors are compensated. Up until the mid-eighties most doctors owned independent practices with no requirement to adhere to set fee structures. As more private practices were purchased by health plans, doctors became employees and their incomes were reduced, dramatically in some situations, which led to an increase in claims and reduced the incentive to return to work.
Between 1986 and 1998 the industry experienced 13 straight years of losses. During this time, 45 insurers exited the Individual Disability Income (IDI) market. Some stopped selling new business while others exited completely and sold their blocks of business.
The market reacted by changing the IDI proposition. Product definitions and benefits were tightened. Products were re-priced and new products were introduced with appropriate rate structures. Underwriting guidelines were updated and maximum benefit amounts and replacement ratios were reduced to no longer replace 100% of someone’s pre-disability income. Claim teams moved toward managing expectations and assisting the insured life to return to work. This was supported by improved training, systems, oversight and controls. The industry also rebranded its image by publishing good news stories, reporting claims paid statistics and emphasizing that insurers have a duty to defend against illegitimate claims.
Competition has started to increase in recent years, and it is to be hoped that the industry doesn’t forget the issues of the past.
In the UK, policy wordings have tended to remain stronger than in Australia. There’s also been competitive pressure leading to a slow extension to product features. This has been tempered by reinsurers warning their clients about the challenges facing the market in Australia. Insurers have avoided adding many product options common in Australia - including those that allow individuals to continue to work in a limited capacity and still receive a full benefit.
The UK introduced agreed value products later than Australia. Initially, this was often on lower sums assured or where there was a mortgage. There are cases where these products have been poorly worded, leading to people being over-insured at policy inception, and it has not been possible to adjust benefits.
For self-employed lives, it can be difficult to verify earnings, which can accentuate this issue.
The COVID‑19 pandemic has exposed further issues. Many policies do not offset state benefits (it is allowed for in setting the replacement ratio) but the increase in state benefits paid during the pandemic has meant many people have significantly more than 100% pre-disability income.
The pandemic has also highlighted unemployment clauses that can be generous. Using the previous occupation for up to 12 months can cause claims issues. Also, establishing the date when a life was unable to work and when the waiting period commences has also proved to be difficult.
The good news is that the industry has been working hard to promote disability income, and develop products which are more affordable and accessible to many more occupations. This has led to sales growing more quickly than for life insurance or trauma products.
In South Africa, the message is not that the picture isn’t bad, but that it isn’t as bad as in Australia, and the market is working hard to address the issues it faces.
Products have not changed substantially in the last five years, although tax changes in 2015 led to an increase in replacement ratios. In the group market, products typically have a change in disability definitions after two years on claim from “own occupation” to “reasonable occupation”. However, the impact of ombudsman rulings has made this increasingly hard to apply.
Pricing increasingly uses data analytics to reassess the finer pricing challenges, such as assessing the risk from individual occupations rather than the occupation class.
Underwriting in South Africa has focussed significantly on improving disclosures, with applications introducing behavioural economics techniques, redesigned questions, and more easily understood language. In the retail market, unfortunately, financial underwriting is usually done at claim and it can be a few months into the claim before it is verified.
Claims management is becoming more difficult. Insureds are not working in one job and often have multiple roles in different industries, which is a challenge to the traditional product. The number of claims is growing, and there is an increase in claims with self-reported symptoms without supporting objective medical tests. This is leading to bigger caseloads and more complex cases.
The situation is not helped by lack of investment in claims systems. Claims teams are addressing this by engaging in and building relationships with claimants to help them return to work, managing claim expectations, and using behavioural economics. Claims teams are also investigating technology solutions to assist return to health and using analytics to identify high risk claims early on to speed up case management.
What does the experience of other markets tell us?
The main learning is that IDII providers in other markets around the world also face challenges - and many of the issues encountered are familiar to Australian insurers.
Also, those markets have worked to improve every aspect of the proposition from underwriting, product pricing through to claims. This has meant constantly redeveloping and improving practices; it’s also called for more investment in training and systems and greater use of technology and data analytics.
There’s no silver bullet to the challenges facing IDII providers in Australia, nor other markets. Neither will the external challenges to the market’s operating environment - economic, social, market, regulatory and legal risk - disappear soon. That’s why it is so important for us to continually investigate, invest in and adapt IDII products.
Our blog series continues with a deeper dive into our ideas around new generation IDII and the complex financial considerations required in underwriting and claims assessments.
In the meantime, if you would like to find out more about our ongoing work to find sustainable solutions for the IDII market, please don’t hesitate to get in touch.