Agreed-Value Income Protection Policies Banned by APRA

Income Protection is a financial life saver to many but is at risk of extinction due to poor profitability amongst insurers.

Life insurers operating in the Australian market have been complaining about losses for years and the trend to longer and more costly claims has recently led APRA to intervene and force insurers to alter their products in the name of greater sustainability. 

Prior to April 1st 2020, insurers could offer either 'Agreed' style benefits or 'Indemnity' style benefits. The key difference between the two is that Agreed contracts see the insurer pay the full sum insured regardless of the person insured's income prior to the claim. Indemnity style cover exposes the policy holder to the risk that a drop in income pre-claim will lead to a lower payout.

The concern has been that replacement ratios have been rising on the back of automatic annual increases and wages growth that has been lower than historical trends. The theory goes claims are much higher as a result as the incentive to return to work reduces when the sum insured exceeds 75% of monthly income (the standard maximum) and heads towards or even exceeds 100%.

Current Agreed value policies remain unaffected and can generally be increased on the same terms. But new policies must now be written on an Indemnity basis which can be far less beneficial to self-employed individuals or those who anticipate a drop of earnings some time in the future. 

On the plus side, Indemnity policies are typically 15% less expensive than Agreed policies.

If you or your clients need advice around this, please make contact to see how I can help.