Troubling signs in disability insurance

New analysis has confirmed troubling signs within the Australian disability insurance market.

Just weeks after a Super Review roundtable highlighted continuing super fund chief executive concerns about Total and Permanent Disability (TPD) claims, new research from major reinsurer, Munich Re-controlled Munich Holdings of Australia Pty Ltd (MHA), has confirmed the depth of the problem.

According to the MHA analysis, "there are serious concerns regarding the sustainability of current retail DII products".

Describing itself as the largest reinsurer of disability insurance business Australia, DHA said it had conducted an extensive analysis using biometric experience data from 2004-2013 which had allowed it to develop new insights regarding the risk factors that drive DII experience.

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"In performing the analysis MHA also made the significant decision to discard the industry-standard actuarial table, which is over 20 years old, and replaced it with a new contemporary table developed in-house," it said.

"The results of the analysis highlighted that the long-term cost of claims is significantly higher than allowed for in office premium rates," the MHA analysis said.

It detailed the key results of its analysis being:

• The cost of DII claims has been increasing over the last decade and that this is due to an increase in the incidence of claims, rather than any change to the recovery rates of DII claimants.
• The rate of claims due to sickness increases with policy duration. The increase is significantly higher than the industry is pricing for. Sickness claim rates for policies in force for 12 years are double that of policies in their first year.
• The incidence of accident-related claims (overall) is increasing. From 2009 to 2013, there was a significant increase of 47 per cent in the rate of accident claims occurring.

Commenting on the outcome, MHA head of life, Andrew Linfoot, said the company's research had revealed that current products typically had claims costs that were 20 per cent to 35 per cent above levels that would deliver a reasonable return for shareholders.

"This suggests that life offices are adding losses to their books with each new retail DII sale," he said.  

Linfoot said that price, while a major factor, was just one of the key factors contributing to the state of the market and that, over time, DII benefits and other terms and conditions had become more generous, which had contributed to increasing claims costs.

"There are a number of reasons why insurers may be reluctant to move. However, I question the extent to which products can be sustained in the longer term, if steps are not taken to develop a more sustainable offering," he said. "Industry participants may face a scenario where their products quickly become unaffordable to the many Australians who rely on such products for their financial protection."