[GRTV] Depressing imbalances in IP market: Hutchinson

There are “distressing imbalances in the income protection market” says Russell Hutchinson, director of Chatswood Consulting.

Monday, October 12th 2020, 11:17AM

Good Returns: Joining me now is Russell Hutchinson. He's the director of Chatswood Consulting, does a lot of research around the life insurance field and knows the market very, very well. Welcome, Russell. Nice to have you in here.

Russell Hutchinson: It's good to be here.

I thought we'd start off with income protection. There's a hell of a lot of changes going on here, and you're currently running a survey of advisors at the moment. So tell us a little bit about what you've found about the market and the product.

We're surveying what advisors are finding out about income protection underwriting right now. And we're doing that because quite a lot of companies have responded to both, if you like, the COVID crisis around income protection in some different ways, and that's showing up more in terms of what offers you're getting through underwriting than necessarily perhaps in all of the public statements that an insurer might make.

Well, because there's been a lot of change in term of how life companies are dealing with applications. So do you think we're going to get a new way of underwriting income protection going forward, and some of the changes people have made been good changes?

I think it's really about the product design. And a moment ago, just we were talking about what the problems are in Australia and the view that APRA has taken about the product. And so really, it seems to me, something quite fundamental about how income protection actually operates as a product, as opposed to underwriting. It's just what's going on in terms of income protection underwriting right now is a stop gap measure, really. And it's before the industry either settles back to normal or a new normal, as we keep talking about. And of course, what's going on in Australia is that APRA's come out and basically said that many of the core things that we know and see about income protection are not sustainable.

So do we have that issue in New Zealand? And do we have an issue around sustainability of the product?

Well look, I'm not an actuary and I'm not an underwriter, so I'm not going to delve into the financial details. But, fundamentally the experience that APRA is seeing is that longterm income protection claims are staying longer than we thought. Much longer. And the effect of that is that we have to keep reserving more and more against those claims. And of course, as they stay longer and they don't clear, we have a rising tide of claims experience.

Yeah. So Partners tried to address that with those changes before lockdown. And I haven't seen anyone follow suit on that. Do you think that it's happening behind the scenes or is that where we're going to go?

Well, that's kind of why we decided we'd survey advisors around what they're experiencing through underwriting. Because during the lockdown, I was getting calls from advisors saying, "Hey, here's a case that I've put into X underwriter. And I applied for, say, a hundred thousand dollars of agreed value cover. And it might've been submitted just prior to lockdown, or it might've been submitted during lockdown. And I got an offer of terms like this, and it was indemnity only cover, and it perhaps said some additional terms, and it had a new definition of pre-disability income, or they were just being deferred or..." So there were all these experiences going on, and we wanted to know more about that.

So it must make it very hard for the advisors because when they put an application in, they must think that it's actually going to get across the line, but then to come back with something totally different makes it incredibly hard to-

Quite substantially different. And then that's why they were calling. "Look at this. This is what's happening." And to be fair, it's been a difficult time for lots of people. This is just one of many things. And another underwriter was saying, "Hey, if you're working your normal hours in your normal occupation, in your normal location, then we will underwrite you as normal." Which is true. Absolutely true. But there weren't many people working their normal hours in their normal occupation in their normal location, where there? So there were these things going on and not necessarily insurer's fault, not necessarily advisor's fault, customer's fault. But we've just got big changed circumstances.

So now we're through most of that, is it settling back to a normal level?

This is the problem. And this is the key question, because if we go back to the question of what's happening in Australia, we say, "Is that happening here?" And we are a different market, and we do have a different experience as a market. And also within that market, different insurers will have different experiences too. So a bank assurer that only ever issues two year income protection benefits, no partial benefits, quite low sums insured. They're not going to be experiencing these issues, which are about long duration claims. There's probably a different experience between self-employed and employed people, not massively different, but that explains why Partner's Life focused their product changes on the self-employed area. And that's something to do with the return to work issue. But in Australia, APRA is saying it doesn't really matter whether they're self-employed or employed.
The problem is that if we have high replacement ratios, guaranteed terms, customers may start in a claim in one way. Let's say they have an accident, or let's say that they have a sickness, which would normally have a duration of say six months or a year. And then during that period, they lose confidence. They perhaps experience residual pain, and they perhaps experience maybe some mental distress from their loss of competence and their disability. And now they find it incredibly difficult to return to work. And some people might put a construction on that, that they are malingering and should get a kick up the backside and go to work. Other people, let's not say that. Let's say, absolutely this is real. But is the product helping them in its current form?

Yeah. So, do you think income protection has a long-term future as a product?

I do. And I do think that it can be a sustainable product, but fundamentally we've got some things to address. And that's what APRA is saying to insurers in Australia. And again, people are not so very different in different markets. I would be surprised if we don't at least have some portion of the problem that APRA is talking about. And if we look back over the last few years... I did a check about six months ago, and we found that base rates had gone up by an average of about 8% for longterm IP benefits. And it's already an expensive product in five years, and that's not counting rate for age change or inflation rate change. Then Partners put up their rates by 12%. And that's a huge slice of the market. And already several insurers were quite a lot more expensive than them.

But it's going to get much harder for advisors to sell the product, isn't it?

There are options available even today. So there's some distressing imbalances in the income protection market. By some measurements, and they do vary, only 15 to 20% of the entire working age market buy income protectio cover. That's too low. More people should have this cover. So some people are getting absolute Rolls-Royce cover, which is probably too good for them in a way, and may, in a claim situation be doing too much, but other people are getting nothing. So it seems probable that a happy medium is to sell more to more people, but not of this type.

Not the Rolls-Royce level.

Not the full monty, so to speak.

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