Should you be concerned about cost-of-living increases on income protection costs?
In 1960 approximately, income protection was first introduced to Australia. Despite its importance often being overlooked, income protection has had a solid premise for nearly 60 years. However, rising claims costs are making insurers unhappy, while increasing premiums make customers unhappy.
In most Australian households, losing a regular income would cause significant financial (and psychological) strain, making it important to cover this risk. Demand for income protection and claims rates can be subject to economic ups and downs.
The economic cycle – like the cost of living – influences income protection demand, as does the claims rate. This poses a threat to growth and profitability. Income protection claims costs tend to be anticyclical; as an economic factor deteriorates, claims costs increase, and once the factor improves, the cost decreases.
The world is changing. 18 years ago, the workplace, home, and social environments were radically different. People now have access to endless information due to digital technology and can stay connected and online 24/7. Due to this age of connectedness, people are working longer hours. They access emails from home and respond to urgent inquiries. However, wages are stagnant, and people are not getting paid more.
Furthermore, their debt-to-income ratios are higher, and their savings are very low. A change in employment terms is also a reality for many. We have seen the growing casualisation of the workforce. It means that jobs are less secure.
As with other types of insurance, income protection is an emotional purchase. Contrary to popular belief, income protection can also be seen as a luxury (despite the tax deduction incentive). Losing a regular income will likely be devastating to Australian households unless they have accumulated considerable savings. Various psychological factors lead people to weigh the pros and cons of income protection differently. Insurance claims are no different. As a result, insurers face additional pressure in the current landscape.
In addition to societal trends, unemployment, underemployment, and stagnant wage growth seem to have had the most significant impact on income protection.
Insurance premiums and rising claim costs
Insurers sometimes raise maximum monthly benefits or sums insured at 3% – 5% above the consumer price index. It’s been a decade since wages grew at those levels, resulting in an increment in the cost of living.
Then, what happens when benefit indexing exceeds wage growth and cost of living while underemployment persists? Income Protection claims and economic conditions are known to have a negative correlation. Low claims rates follow good economic conditions (people are very motivated when the sun shines), whereas high claims follow bad economic conditions (people are less motivated to return to work promptly). Stress caused by a poor economy contributes to mental health problems and then leads to higher claims frequency & length.
If you‘d like to know more, reach out to expert advisors at Aspect. They are committed to providing you and your clients with the best services possible. You are welcome to ask us any questions about our Income Protection policies. Having over 40 years of collective experience, Aspect Underwriting is able to deliver positive outcomes to its clients. Our team takes pride in providing products that meet the needs of our clients, followed by service that enhances their experience.