Insurance providers are making swift developments to their income protection (IP) offerings as the uncertainty of life in a fast-paced, volatile world prompts an even greater need to secure and protect a person's greatest asset against accident and illness.
The global financial crisis (GFC) and the subsequent market dips led to more interest in insurance to minimise personal risks, yet according to the most up-to-date figures only 26 per cent of Australians have IP insurance.
The Rice Warner Actuaries Underinsurance Report found that in June 2011, the total aggregated cover of income protection insurance is $12.9 billion per month, which is 14.2 per cent higher than 2010. The total working age population has increased by 1.2 per cent and the consumer price index rose 3.6 per cent through the year to June 2011. Therefore, the gap should have decreased during the year to 2011, but it is still a substantial improvement.
The cost of underinsurance
The issue of underinsurance is still a significant one. The total cost to the government of life underinsurance across Australia is calculated to be about $140 million per year, as publicly funded social security benefits fill the gap. Inadequate IP cover alone costs $74 million per annum, as estimated by Rice Warner in 2010.
Furthermore, CommInsure's 2011 Life Insurance Survey revealed 56 per cent of Australians are not taking out insurances because they think they cannot afford it, followed by 50 per cent who believe they have enough cover through superannuation, and 46 per cent that think insurance is not a priority.
"Our research highlights that a significant number of people may be forced to rely on government support if an unforeseen event occurred," CommInsure head of retail product and pricing Gary Bailison says.
"This is a serious situation given the average Centrelink payout is less than $350 per week, compared with an average weekly income for working Australians of $1,322."
Product developments
Access to more products should help to decrease the underinsurance gap. The first half of 2012 saw big moves from insurance providers expanding their product coverage to ensure greater cover options and benefits.
Enhancements to product offerings are closing gaps, BT Financial Group (BTFG) national life insurance product manager Scott Moffitt says.
"We've introduced a form of IP to the very high-risk segment," he says.
"We had about 400 occupations that we didn't previously cover... our IP-style products certainly do now."
The changes were made as advisers are very good at not just recommending a standard IP solution to all clients.
"The variety of the type level product or the base level product, or a 30-day or 90-day wait, is quite wide so advisers are actually assessing the need and affordability to position the right cover for their client," Moffitt says.
"We see that in the variety of sales that are coming through."
BTFG launched telephone claims 18 months ago, which is now seeing close to a third of its claims being processed and approved with a medical certificate without the need for forms or signatures, resulting in a faster process for both sides of the party.
Enhancements were necessary to AXA's Elevate offering this year to keep up to date with changing job occupations and income needs of Australians, AMP head of product on-sale John Ashton says.
"We've now extended the list of occupations that advisers can go to and better articulate what their client's occupation is," he says, adding that Elevate is now in excess of 100 mining industry-specific occupations.
"Our past offers limited the maximum benefit to $10,000 a month; we're now extending it to offer up to $30,000 a month."
In addition, AMP applied new underwriting limits and refreshed definitions for total disability with IP.
Macquarie Group is looking at its offering and, while it has not officially implemented any changes, it is keen to demonstrate its place in the market.
The key areas of confusion for clients are around the differences between indemnity and agreed-value policies, and their reliance on superannuation for full IP cover, head of insurance Justin Delaney says.
"Some funds do have IP as part of their cover, but others don't," he says.
"The reality is, without having advice and without the awareness of knowing what [buyers] actually need, it's going to be difficult to assess whether or not [the buyers are] appropriately covered."
ANZ Wealth head of product, marketing and reinsurance Gerard Kerr says what is known today about how to manage IP is certainly more advanced compared to 10, and even five, years ago.
"The way we've been able to offer a lot more coverage to a lot more people has certainly evolved over time, and that's because we've come to understand medical conditions and evolve products to real situations, as opposed to scenario testing," he says.
"IP is going to continue to be a cornerstone of people's protection. [We paid out] around $155 million in claims... last year."
The amount of claims and the stories of those who've benefitted must be promoted, Kerr says.
"That's not going to be easy - you can't just do one campaign and that's it. It must be constant. There's a certainly long way to go."
CommInsure continually reviews its IP range and has recently reduced the threshold for part-time employees from 25 to 20 working hours per week in order to qualify for insurance cover.
Bailison says this reflects the increasingly flexible and varied work arrangements, as more than 35 per cent of employees are now working part time in Australia.
Collective education efforts
While the life industry believes that IP can give Australians the peace of mind they're looking for, communicating this benefit is another story.
Insurers agree that IP needs a collective push to address poor awareness but improved education for Australians will need to work simultaneously with more adviser communication and assistance.
BTFG created its Lifesaver Plus tool to help advisers position the loss of future income to their clients if something were to happen, Moffitt says.
"If we can position that loss of income, it helps.
"There's still a challenge that we have in positioning the need for IP and it's not just an IFA [independent financial adviser] thing, it's a community awareness issue.
"People are born with the need to insure their car but not born with the need to insure their future income. That's a broader education piece."
Furthermore, there's a lack of IP discussions occurring in workplaces because it's outshined by workers' compensation, being a mandated protection and written as part of the employment, Moffitt says.
"There are alternative ways in which we can promote income protection and maybe that's more through the employers and try to push the obligation through small businesses or larger employer groups to also get them to promote the need to look at insurances like IP," he says.
"Worker's compensation only takes you so far and that awareness of that gap of either short or long-term disabilities is still very low."
"The industry has generally moved towards improving the communication and support material that we provide through to the adviser network but there's definitely a lot more that can still be done."
Lifewise, the Financial Services Council's life and income underinsurance campaign arm, is promoting IP as "living insurance" to highlight its relevance while someone is still alive. It recently launched a social media element on its website as a way to better connect Australians to the issue, though this is in its infancy.
It's critical that the education piece for IP occurs on a community level, as most information comes from the media typically when there is an unpaid claims issue, which then adds to the negative public perceptions of insurance.
Turning the disengaged population into informed and ultimately adequately covered Australians is a long way away, but the commitment from the industry to make IP a priority is only becoming greater.
There are massive gaps in people's thinking, Asteron Life executive general manager Jordan Hawke says.
"The underinsurance issue in Australia just doesn't seem to be going away," he says.
"The primary reason behind that is the Australian psyche of 'she'll be right'."
In conjunction with that lax attitude, too many Australians are placing total reliance on Centrelink as a safety net.
"If your income is $1300 a week, the average Centrelink benefit is only $350 a week, therefore this whole education piece needs to occur in the community about the role of insurance," Hawke says.
"Also, when you buy insurance, you're effectively buying something that's intangible so you hand over your money but all you get back is a policy document, quite different from buying a car. That in itself has barriers."
If more people knew IP was tax-deductible and cost-effective, that would relieve the burden into the community but, at present, Australians are continually failing to see the value of their income in the future years.
Real-life examples, with and without IP, can better illustrate the potential outcomes and hardships, Hawke says.
"If you think about your income, IP is basically going to cover you for the rest of your working life.
"If someone's on $100,000 a year and aged 40, they still have 25 years of a $100,000 income and that's basically exposed if they don't take out IP."
Another challenge for advisers is getting clients to understand that workers' compensation doesn't cover people 24 hours a day, seven days a week, Hawke says.
"The only way that can be done is through sharing stories. This industry is littered with stories of people who have insurance and had the benefits and outcomes of having insurance. But there are still a number of stories where people didn't have insurance and the broad impact not only on themselves but on their families and businesses as well."
AMP hopes to challenge negative views on claims by spreading awareness to advisers and the general public.
"In excess of 96 or 97 per cent of our claims are paid," Ashton says.
"Paying claims is a significant part of our business. Over the course of last year, the business paid out about $750 million in claims. For income protection alone, that figure was $200 million."
Kerr admits that the insurance industry's marketing efforts have not been compelling over the years, so a new approach is required by all those involved.
"It's been a real challenge for years, it's very hard to change people's perceptions," he says.
"Quite often we see how advisers actually position life insurance in the client conversation - we find that they lead with income protection.
"That tends to be the starting point of the holistic need."
He says many people think they need it but the unfortunate topic makes it difficult for most to address.
"We'll continue to position IP from a positive rather than a negative perspective."
Improvements in service
Away from the product itself, the service element of the IP process also needs to be addressed to make the job of advisers much easier.
"We need to make it as streamlined as possible for advisers to get business in the books and policies in place for their clients," AMP's Ashton says.
"It's not just a product or a service - it's about the proposition you can put to advisers and work with them on the development of those to the extent that they need them.
"Over the years we've come to work with advisers in a more formal way so we have adviser groups across AMP that come in on a regular basis to get their feel for what's going on in the market, what they're seeing on a day-to-day basis and questions they're being asked."
A new process put in place by the group allows advisers to use their statement of advice or fact find during the initial IP submission stage, rather than requiring a separate questionnaire often required for accountant input.
"Advisers go through an extremely thorough process to get all the relevant information so it also fulfils the requirements we need as an insurer to back up the application," Ashton says.
"We know we need to cut back the number of times we go back to an adviser to obtain further information because as soon as we start to do that, it can push out the process to many days for some customers."
In addition, most insurance departments encourage direct communication between advisers and underwriters for more accurate details and exchanges. Traditionally those roles operated in isolation from one another but underwriters are also now stepping out, as seen in recent insurance roadshows.
