Have you heard the news? Insurance premiums are going up… drastically! A violent storm of events has made it absolutely essential for the insurance industry to overhaul its products and pricing to survive in the long run. Okay, maybe it sounds a little too dramatic, but over the last five years, the industry has lost over $3 billion, and the Australian Prudential Regulation Authority is taking a tough-love approach for the sustainability of the industry.
Prices are increasing from 1st October 2020
We have seen some pretty hefty increases in prices recently to both retail insurance policies and those through industry funds. But it doesn’t stop there; there’s more to come. All insurance providers are set to increase their premiums drastically. There will be some significant changes to income protection premiums, TPD as well as Life cover.
The ballpark figure for most of the major insurance providers is a 20% price increase. This figure varies greatly depending upon your type of cover. For example, Death and TPD with UniSuper are going up less than 10%, while income protection to age 65 is going up by more than 130%. Now that’s a very big difference and a huge increase to anyone holding that particular type of policy. Hostplus have upped their income protection by 73%. TAL Life has increased death cover by up to 80%. And OnePath is increasing income protection by 25% and TPD by 12.5%.
All insurance providers are increasing their prices, and there’s no set amount. The increases all vary greatly and so it’s absolutely essential that you review your insurances in the coming months to make sure your level of cover is appropriate for your needs and sitting at an affordable price.
Why Are Insurance Premiums Going Up?
To Ensure the Sustainability of the Industry
In December 2019, the Australian Prudential Regulation Authority (APRA) launched an intervention after the life insurance industry collectively lost approximately $3.4 billion over the preceding five years.
The losses came about because of unsustainable pricing and flaws in the product design. Basically, insurance companies were offering prices that were unsustainable and generous product features that were putting them in a less than profitable position — all in an attempt to stay competitive and gain market share (Greed is the root cause of all freefall perhaps?).
In response to the huge loss sustained, APRA brought in an upfront capital requirement on all individual disability income insurance providers. This means the insurance providers need to show they have secured investments to be able to pay out claims at a sustainable rate. In addition to this, APRA also removed the option of Agreed Value policies, which means the insured person cannot claim more than what their income was at the time of claim. To ensure the sustainability of products, insurers are also expected to avoid offering policies with fixed terms and conditions of more than five years, and they need to manage the risks associated with longer benefit periods effectively. Have a look at my article for more info.
Interest Rates are at an All-Time Low
When someone makes a claim against their insurance policy, the insurer needs to have funds available to pay out their benefit. Insurers pool premiums and invest the money in assets to generate income. Because they need to pay out an undetermined amount in claims, they need to keep a portion of their funds in liquid assets such as cash. So, when someone makes a claim, they can easily access the money for the payout. As you are probably aware, interest rates are at a record low, and while this is great for any of us paying off a mortgage, it’s not so great for people and companies who have money invested in cash assets. With an extremely low rate of return being offered right now, insurance providers are making a lot less money than they do when interest rates are high; hence a price rise.
Flow-On Effect from COVID-19
Insurance providers are bracing for an onslaught of mental illness related claims as the full impact of job losses and social distancing are felt by Australians. Claims relating to stress, anxiety, depression, and interestingly accidents have all increased. A price increase is essential to be able to cover the increase in claims and keep the insurance industry afloat.
Policies cancelled due to Protecting Your Super Package reform
When the PYSP reform came into effect, many people with low or inactive super balances had their insurance policies cancelled. No insurance policy means no premium payments, and as a result, the insurers lost income. Have a read of my article about this reform.
All of these factors have combined to create the perfect storm to put the insurance industry in crisis. To manage this crisis, it is necessary to raise prices.
Insurance Prices going up 1st October 2020
The price increase is here, and for some policies, it’s a very significant rise. And by the look of things, it will be here to stay for the foreseeable future. There is proposed legislation that could see insurance companies pricing their policies every 18 months based on the profitability and claims statistics that have come through. This is helpful for the insurers’ sustainability but could potentially leave your wallet a little thin. For this reason, it is essential to ensure you take the time to review your insurance on an ongoing basis to avoid getting a nasty surprise in the way of a massive premium.
Why Are Insurance Premiums Going Up?
If you sit back and do nothing, your current level of cover is going to cost you a lot more. For example, if you happen to be one of the people whose cover is going up by more than 130%, your $600 premium will now cost around $1,400! As you can see, it’s definitely not the time for complacency.
Review the Need
The first place to start is looking at your need for insurance. Often, our need for insurance reduces as we age. As young adults, we have a lot of debt, we might have a young family to take care of with many expenses, we may need to take time off of work to care for the kids, and we’re at the beginning of our financial journey. But, as our children age and move out of home, we pay down our debt, we get pay raises, and accumulate more wealth — our need for insurance is no longer as high as it used to be. If we were to pass away in our 50’s, generally speaking, our families would be in a better position financially than if we were to pass away in our 30’s. The need for insurance is reduced. So, this is the place to start. There are many calculators available online to help you determine your insurance needs. Take a look at our free calculator.
Reduce Covers
After reviewing your need for insurance, you might find that you have much more than you currently need. Reducing your cover is an easy way to reduce the cost. If you can shave off some cover to get your premiums down to a sustainable price, then it’s probably going to be a good decision. The goal is to sustain a cost-effective level of protection to cover only what you need.
Review Providers
Different providers and products have slightly different features, and sometimes big price differences. There’s plenty of information out there; you’ll just need to keep in mind that some of the info can be slightly biased. For example, Life Broker compares five different companies but, TAL Life owns it. While it does a good job of comparing the providers, it can try to subtly push you in the direction of TAL. So, just keep this in mind during your comparison.
Comparison websites like Finder and Canstar are a good place to compare some insurance options. The retailers of the products listed on these websites have paid to appear there, so keep in mind that the entire market is not reflected on these comparison sites.
When reviewing providers and products, there are a few things you need to be wary of:
- Level Premiums. The premiums you pay at the beginning of your policy are generally higher than stepped rates. Over the life of a level-premium policy, the premiums become more affordable — there’s just the hurdle at the beginning of the policy to get over. If you are paying level premiums on your current policy, you need to be aware that you’ve been paying a higher premium at the beginning to move towards the lower premiums later on down the track. To exit this policy and start again means that you’ll need to go back to the beginning and pay a larger premium again if you want to keep the level option.
- Agreed Value Income Protection. As mentioned earlier, agreed value is no longer an available option with income protection. If you have an agreed value policy, it might be worth hanging onto. Especially if your income has been reduced since the benefit amount was agreed to. If you were to commence a new policy, you can only be covered for the income amount you’re earning at the time of the claim. Of course, if the price rise is significant, it might make sense for you to forgo your agreed value policy to find a suitable cheaper option. Finding an affordable level of premiums is the goal here.
- Changes to medical situation. When changing policies, you may be subjected to underwriting if you have any medical conditions or you’ve had a change in a condition. When a condition has progressed or gotten worse, your current insurer generally needs to pay out your benefit unless any exclusions apply. But if your state has worsened and you’d now like to apply for a new policy, you run the risk of not having that condition covered, or a loading could apply which would increase the price of your premiums even more. If your condition is going to mean the premiums of a new policy are going to be loaded, it might be worth staying where you are.
Insurance Review has never been so important
With some policies set to increase by more than 130%, there has never been a more important time to review your insurance. Reviewing your insurance now gives you the opportunity to find a level of cover that’s right for where you are currently at with your finances and goals. Scheduling a period review in your calendar means that you can reassess and tweak your cover as you go, to ensure you always have the optimal level of cover for you and your family, while maintaining an affordable premium.
More to come in the Future
It’s looking like APRA are going to crack down even harder in the not too distant future to ensure the sustainability of the insurance industry. There is proposed legislation for premiums to be reviewed every 18 months in regard to claim statistics, as well as the proposed stripping away of benefits such as own occupation, and using long service leave and other employee benefits to offset your income so the insurer doesn’t need to pay out as much as they previously would have.
With the price rises ranging from less than 10% all the way up to more than 130%, it’s certainly going to give everyone a bit of a shakeup. Remember to be on the front foot and take a proactive approach to review and manage your insurance levels. While it seems like a harsh penalty for consumers, it’s important to remember that these changes are to ensure the sustainability of life insurance. Without these changes, it’s possible the insurance industry could flop.
Remember to be vigilant with undertaking your insurance reviews. Make sure you compare all the options on the market and get as much info as you can before making your decision. As you’ve seen, choosing the wrong policy for you could be a costly mistake.
Conclusion
Want some help reviewing your Insurance Cover? Send me an email at craig@craigbigelow.com.au and I will see how I can help
