By Michael Downey, General Manager of Retail Distribution and Partnerships, MLC Life Insurance

Income Protection: A new beginning for advisers and clients

In late 2019, APRA outlined a new framework for life insurers in Australia. Following its thematic review into the sustainability of income protection products, it made it clear that if things didn’t change then these products would become unviable in the future.

Amongst other requested changes in its letter to all life insurers, APRA said insurers must end the sale of Agreed Value policies, stop offering policies with terms that are fixed for more than five years, and ensure effective controls are in place to manage the risks associated with longer benefit periods.

For customers, our challenge to design, price, and manage fit for purpose products resulted in significant and frequent (industry-wide) premium increases over the last few years - more than what they would have expected at the commencement of their contracts.

It is a challenge we as an industry must confront head on to ensure there is a future for income protection in Australia.

Customers still want income protection products, but at a reasonable and sustainable price

MLC Life Insurance will launch its new range of income protection products on 1 October. We are excited to bring these to market.

To help us create and design them, we conducted detailed qualitative and quantitative research over the last 18 months to help understand consumer, licensee, and adviser sentiment to inform an appropriate product design.

The clearest finding from the research was that both customers and advisers value price and income replacement ratios, well above all other features.

This was not unsurprising, in and of itself. Why would a customer not want to have more of their income replaced if they are ill or injured? Unfortunately, this benefit led to scenarios where customers could earn similar, or even more, income on claim than they could when they were working. Evidence from industry wide claim statistics shows the higher the replacement ratio, the less incentive for customers to return to work. That is not sustainable, nor is it what the products should be designed to do, which is to provide income support to people who are not able to work for a period of time.

We also discovered that 83% of our retail insurance customers earn $150,000 or less per annum, and their income needs were highest during the early stages of a claim. Interestingly, 89% of these customers were able to return to full health within the first two years. This is reassuring news and shows that our approach to income support, in combination with the right recovery management program at their most critical time of need, is key to getting them back to a healthy lifestyle and to assist them return to work. We want our customers to have their life return to normal however, we also know that sometimes customers have income replacement needs for much longer and we must provide a solution for them as well.

Our biggest insight though was that advisers wanted us to introduce products with greater certainty of future premiums, underpinned by more choice and options. In essence, match the needs of clients with more choice and flexibility, and be able to offer a sustainable IP product.

Go further than the minimum for new IP products

Our underlying philosophy when developing our new product suite was to do more than ‘just enough’. Underpinned by our ambition to be Australia’s leading and most trusted life insurer, we went back to the core principle of how we could meet customer needs.

We looked at the principles of indemnity, and insuring definable, calculable, and meaningful losses caused by accident, injury, or illness.

We can’t reveal too many details of our new products just yet, but what we can say is they are focused on giving more choice to advisers and their clients. At every stage of the design process, we asked ourselves: What need is this fulfilling? And will it be a sustainable offer?”

For example, if we know that most people who make an income protection claim return to work within two years, and they have their most acute income need during the early stages of a claim, how can we design our product to prioritise customer needs during this time, whilst still providing support for customers with more severe, and longer term, sickness, and injuries?

This is not the end for IP, but a new beginning

Our research shows that customers value Income Protection as a product, but the sobering reality is that the traditional offers in the market have not been sustainable.

Soon, a market refresh will begin for advisers and their clients who need income protection should they unfortunately suffer illness or injury. But with customer needs varying and adviser preferences evolving, we have an opportunity to offer more tailored solutions through greater choice and flexibility. It is an opportunity we must take in supporting the insurance advice industry.