The New Normal for Income Protection #3 – Transcript

Fraser Jack
Welcome to this part three of our five part series on the new risk environment for income protection. As we settle into the changes from IDI I’m your host, Fraser Jack. And in this episode, our panel nerd out on the technical side of income protection, product profitability, including the five levers that can be used to keep the products sustainable. There are some very interesting points in this episode that may change the way that you think about income protection. So let’s dive into the episode and nerd out together. Welcome back to our series, we are talking all things around the new world of disability income, and how we’re how we’re working with advisors, or how advisors are working with their clients in the space. Look, let’s talk about the fact let’s make no, no, we won’t stay away from the idea that this has been a really terrific trip difficult time for advisors, and especially around the idea of having to compare all the products. And look at all the products from a new products point of view. And knowing new products is obviously a big part of that. How have you gone about it? Cathy? How have you gone about comparing all the products that have come out and how you’re going to then start looking at what becomes the new normal?

Cathy Kayess
I think the the biggest thing is, is we’ve gone from what was mostly apples to apples to what I like to term as the new fruit salad. Okay, a few things that look like apples to apples, but there’s a few other, you know, banana and an orange floating around as well. It’s the biggest thing has been firstly getting your head around how each product plays out. Now, you know, there’s been a lot of work done, I know there’s a spreadsheet kicking around with high level overviews of every single product. But it’s not just, you know, the product, the new product, you need to also understand how the client plays in the old product space and how that compares to the new product and is that best interest. And then, you know, once you’ve figured out what your potential solution is, and if it’s an new product, you then need to understand how that product provider wants you to quote on that new product because each system is different. Now I’m in the situation that I reviewed a lot of IP products just in the past three months when this new product has been out. And I’m only this week doing my first recommendation that a client takes up a new product. And I’m not sure if the other two are in the same space or whether they’ve already, you know, dived headfirst into, into throwing in clients into new products. But it’s not been an easy space to make sure that you’re doing the best thing by the client.

Fraser Jack
Yeah, I love I love the analogy of a fruit salad. I love the difference between knowledge and wisdom, you know, knowledge knowing that a tomato is a fruit and wisdom of not putting it in a fruit salad. It kind of feels a bit like that, though, doesn’t it? Sometimes, you know, looking at these different types of products. I John, you sort of shake your head at this. But it we are going to have to get used to that new space of you know, moving clients from old products to new products.

John Cachia
Yeah, 100% I, you know, I think the pricing pressures on the existing policies as well too. If it hasn’t already come, it’s coming with found in most cases to up until now that we’ve been amending existing policies. So it has been alright, we’re going to go in density, instead of a grade, we’re going to pull you out of level premiums and go to step two premiums. Because still from a benefits perspective, we’re still talking about superior policies for from a from a benefits perspective. And yeah, it may be the old head sitting still on my shoulders where it’s just around wise claim ability, highest claim ability, but I just don’t think that that’s going to change because that’s Arranmore value set around you know, just trying to have the certainty and the peace of mind. There’s an insurer that’s getting a lot of market share at the moment, because they’ve got a very similar policy to what was pre changes, and the others ones, especially which we’ll talk around, you know, the own occupation to any occupation change, I just still can’t change your client from an existing scenario to that scenario. And I know I’m going to have to face this soon enough, but I’m yet to and just to be honest with you, I appreciate how other advisors are scared or feeling the a difficult situation because I’m still too for my head. How? How to get through this.

Fraser Jack
Yeah. Interesting. Well, Serena, how have you gone about this, this new world of comparing all these products?

Serena West
Yeah, well, I was lucky that in sleepy little Paris, as we joked, was isolated from the rest of the world. A group of risk specialists all got together, you know, to talk about us are all practitioners in our own space. And we spent a couple of days talking about all of those things and sharing. So I, I really found that community to be really helpful. And as Cathy mentioned, there was a spreadsheet being sent around, which obviously got center and all of Australia. And then it was a question of going through it, and you had the the BDM procession, everyone wanting to come in and explain their exact slant on that. And then really trying to dig through, you know, what does it actually mean, in real terms? So asking those questions of, of actual scenarios, how is this going to play out? You know, we were laughing to ourselves thinking, anyone that wrote IP in that immediacy of that change, would want to be incredibly careful, because I’m not sure how they would possibly be able to say, they knew actually what they were doing. I mean, it’s one thing if it was a completely new client, and the client had no cover in place. So in that situation, the only thing they can be is better off because all they have available is what is now available. If you had a client that had existing cover in place, it needed an awful lot more work. And the goalpost is still moving, you know, and I’ve commented to a lot of clients that, that I would expect this next period to still show some change in in the income protection office. And that these might stabilize to sort of the mid later end of this year. And similar to what John was saying is, is looking at some clients were who were under extreme premium pressure to say, okay, what can we do, because the percentage spend has become disproportionate, you know, I don’t want clients going to work, purely pay insurance premiums, you know, it needs to have some balance in their cash flow. So there was an awful lot of work put into this over time.

Fraser Jack
Yeah, you’re absolutely right, in the moving golf posters as an analogy that I can certainly visualize, too, when it comes to Jeff, what have you what have you seen, obviously, it wasn’t just up to the the advisors to get their heads around a whole lot of new policies on the market, it’s up to the insurance as well to work out where they where they will sit?

Dr. Jeff Scott
Yeah. And, again, the from an income protection point of view, the guidelines that were set down by APRA was our was our starting point. And everyone had the same starting point. So we looked at the APRA measures. And that’s how we built the new product that was issued from the first of October 2021. The X rays Institute also came out with a set of set of guidelines that they said, here’s the various things that you that insurance companies should possibly consider when designing their product. Some companies literally did a cut and paste out of that other companies took of us somewhere between the APA guidelines and the Institute of Actuaries guidelines. So the APA guidelines were mandatory. The Institute of Actuaries guidelines were suggestions. And what we then had to do and again, this is something that we’re looking at as well, is that we know for a fact that there’s going to be existing benefits, features and options that clients are still going to value. So Serena, and John and Kathy Vall mentioned this. So things such as the old specified injury benefits, the trauma benefits, the agreed value benefits. We know that they are valued by existing policyholders. So the question is, what’s the appropriate price for those benefits? And then the next thing is that when it comes to affordability for the new product, what does that look like? So when we actually sat down and looked at this, this was that was a fairly big thing. So our existing policy versus our old policy and then look at the various areas that we need to be mindful of in there. And basically, what I took a look at, there’s basically three airport five areas they need to look at. So one was the capability clause was the one that we now have the capability clauses effectively, a Back to the Future situation. So those of you have been in the industry long enough will remember that approximately a decade ago, almost every single life insurance policy. In Australia had a capability clause. And what it effectively stated was that if you have the ability to work, and there’s work available in your normal occupation or usual occupation, then you have a responsibility to return to that role in the capacity that you can. Otherwise we have the right to produce your benefit. And again,

Fraser Jack
there were this is a really interesting part. I mean, I just want to dive into this, which is that the fact of somebody if they can go back to work, right, and it’s all very nice to say, Oh, it’s a it’s, it’s, we can get rid of that clothes. And it’s good for the client if it’s not there. But the fact is, if they can’t get back to work, then surely they should be right.

Dr. Jeff Scott
Well, again, and when I talked to the very good talk to our claims, people, and I was at MetLife. And also talk to claims people around the industry. The first thing we want to do is, again, the first thing that most claims people, they’re incredibly caring, and I found this across the industry is the first thing they want to do is one return the person to health. Second thing is return them to wellness, and then finally return them to work.

Fraser Jack
This isn’t just on this before we go we move on. Then if then if if if they can go back to work and then go back to work, then then theoretically, all of our other clients have got to pay for that. Right?

Dr. Jeff Scott
Absolutely correct. And that’s and that was a contributing factor to some of the claims experience that was happening across the industry, is that there were some clients. Now again, the majority of clients are, again, what we found across the industry is the statistics that we’ve seen, from KPMG, the Institute of Actuaries, and APRA, basically states that 85% of all clients are pay and closed within six months. So from the time they lodged their claim to the time they’re back at work six months.

Fraser Jack
And so what are the risks of our panel? John knows, sorry? No, Kevin, does? Is there any problem with the capability clause in your thoughts?

Cathy Kayess
I think it justifies it conversation with the client this week, he’s like, what was my premium gone up, and we started discussing some of these changes. And I said, one of the problems is, is that it was more beneficial for some clients to stay on claim, because they had agreed value definitions, they were getting more in their pocket, staying at home than they were by going to work. And because of those people, and it’s, you know, I don’t know what the numbers are on that. But it’s because of those people that unfortunately, everyone else has to support that by paying higher premiums. So it’s a difficult conversation to have when you know, it’s a client asking why their premiums are going up? Yes, Serena,

Serena West
I find the advisor has a an amazing opportunity to help guide the mindset of the claimant and the claimants family. And so I try really hard to work with the clients around finding their new normal, you know, particularly in the claims that that I’ve had, they haven’t been paying close in six months, you know, some of these people are really serious cancer clients. And the client at times feels guilty that they’re malingering. And they’re trying to return to work too early trying to fit treatment in between meetings, and I say, Guys, you you’re actually not the problem here. I need you to get well. And I really admire your your efforts. But I try to speak with clients around a reasonable duration of claim, and also the overall benefits to their life have been back at work. You know, I mean, at times, we have this view that our work, work is awesome. And it’s how our society functions. And it’s how we interact. You know, the first question people ask us all so, Fraser, what do you do? And if you say, Oh, I sit on the couch all day doing nothing, that that might get a laugh once or twice, but after a while, people are gonna go home, you’re not doing much. So So I think that the conversation and the attitudes around these things can be influenced and improved for the better. So that the genuine people who who truly need to be on claim for a significant period of time are doing so without any any ill feeling. So I think and Jeff’s right, it is a last resort, you know, the, the claims managers that I’ve worked with that amazing and caring and kind. Yeah,

Fraser Jack
tell them what are your thoughts on the capability clause?

John Cachia
I see not really an issue with it, as long as it’s ticked off for medical professional that’s independent. Or, you know, I’m pretty cool with that. I think the ones that are fans that, you know, there’s this certain people that try and milk the system, let’s be honest. And yeah, I don’t think anyone wants that. I think we wanted there to be there if they need it, and if they don’t need it, well, you know, try and get back to try and get back to work. And, you know, I think insurance companies do a stellar job He tries to get clients back into the workforce, which is obviously a win win for everyone. Well, it should be, I’ve been on the claim myself, personally, was quite sinister, had spawn surgery and whatnot. And the insurance company was awesome with me when I was a claimant, you know, and, you know, the took the time said, you know, do what you need to do. But, you know, my mindset was getting back to it. I love what I do, too. And what I need to do and to be honest with with you, they were probably going to give me more time than I actually needed to get back into it. So you know, being on the reciprocate on the recipient end of this? I don’t see I don’t see any issue with it

Fraser Jack
yet. Jeff, if that capability clause was in there, and then what why did it find its way out of policies,

Dr. Jeff Scott
that’s a great story. Quite simply, there was a particular insurance company about 10 to 15 years ago that when they updated their PDS, they, they forgot to put the capability clause in. They panicked, but then when it went to the research houses, the research houses actually gave them additional research points for not having the capability cause him. They saw that as competitive marketing advantage, and ratings house advantage. And after the one did it, then many other companies followed suit shortly thereafter. So I think that from a particular mistake that was made early on, everybody followed. In removed it, I see it as being a necessary part of the risk management process. And again, it’s only used in extraordinary circumstances.

Fraser Jack
Yep. And that is an interesting story. Now, Jeff, you mentioned that we talked about the five different levers and weave capability causes one, what’s the next one,

Dr. Jeff Scott
the next one, I look at his rehabilitation retraining, the very simple thing that we’ve seen is that between 80 to 85%, of all claimants are paying close within the first six months. So then once they lodge their claim, they go on claim they get paid within six months, they’re back at work, and payments closed. And so that that 85%. And then we also know is that not approximately industry, information says probably 92%, returns to full time gainful employment within two years. So what we found is that the rehabilitation and return to work is an essential part of this. This is one of the things that APRA mentioned as well, from a MetLife perspective, we see three components. So one is before they ever get to claim prevention is probably a big part of this. So MetLife has the MetLife 360 Health Program, which includes TelaDoc, which allows customers to get access across preventative health care, such as nutrition, mental health GP referrals and specialists with no at no extra cost to the client. And they don’t have to be on claim. So we believe at MetLife, that prevention is better than cure. And we also was we also have discovered from the research that’s been done previously, is that if a person’s engaging in these programs, before they ever go on claim, the duration of their claim, and the severity of the claim is normally reduced as well. So that’s step one. Step two is rehabilitation and retraining. So in other words, assisting the client to return to health, return to wellness, and then finally returned to work through rehabilitation retraining. And MetLife has what’s called the nourish program that also helps them through that as well. So again, prevention is the first part, the second parts rehabilitation retraining. And we talked about the capability clause. So for me that rehab and retraining process, and the prevention becomes a necessary part of this entire process. So in other words, the insurance companies don’t just pay an amount to the client, but they’re a partner with the client, as part of their entire health rehabilitation retraining, return to work return to wellness program yet

Fraser Jack
certainly makes a lot of sense, doesn’t it from a not just a lucky, as you said, the health and wellness that not just the physical but the mental side of, of dealing with a claim. And, you know, I think all the advisors here on the on the call have have dealt with many claims. And it’s been one of those scenarios that I’ll be obviously everyone’s different, but the clients mindset. So in what do you think the client’s mindsets, one of the most important parts of that?

Serena West
Yeah, I think it is. And I also feel that’s why it’s so important for the client, at the earliest point in the claim to feel listened to, the sooner you can get things approved and sorted and they know that you have their back. They’re not coming from the back foot. You know, I think that people obviously buy insurance and they at the back of their mind kind of think, gosh, is it actually going to work on the day that I need it. And so when they launched their claim that almost expecting a fight or to be knocked back, and so we just try to make sure that as soon as it can. We’re done and also making sure that you meeting people where they’re at. And making sure that you’re, you’re being there as, as the in between to help the ensure and explain that, at times, you know, there’s an audit process, people can’t release hundreds of 1000s of dollars, if there is missing data. And sometimes you need to go in and find, where’s the data missing? Because why can’t Why can’t this claim be paid. And clients are typically not in the headspace to be able to manage that. So I feel that the advisor and their team have a huge role in being able to keep the mindset up. And naturally, of course, being realistic.

Fraser Jack
Yeah, and understanding that, like you said, you know that that missing data, it is a language, isn’t it that sometimes there’s a translation about going in and finding an understanding where to look for that missing data and just be able to bring it all, bring it all out and bring it out front so that the claim can be paid, which is what a lot of the all companies are really there to do to pay those claims. Definitely mentioned, the obviously the that being a big part of rehab and returning to work and the length of claims being a big part of the process. The one of the other things I wanted to get into is one of the other levers I wanted to get into when it comes to prop, you know, you know, working out if a if a product is going to be sustainable and profitable in the long term, therefore sustainable for the client, is that own occupation in any occupation definition of John, obviously, you’ve mentioned this a few times as well, how big a part is that of the process,

Dr. Jeff Scott
we see that MetLife saw that as a key lever. Now, the thing that we looked at with this is that the own occupation versus any occupation, the guidelines that some companies have gone by is that we’re accustomed has been on claim for a period of time, and it’s usually often two years, then they’ll change from an own occupation or their usual occupation, over to an any occupation based on education, training or experience. MetLife has intentionally chose not to go down that path. So with a policy that we launched on the first of October 2021, we go for an own occupation for the duration of the policy. And the reason for that was that APRA asked the various insurance companies to be able to manage long term risk, certain companies have chosen to manage the long term risk by going from an own arc to any arc after two years MetLife has chosen a different path. So what we’ve chosen to do, instead of going down that situation, is by saying we can manage risk in three in three other ways. So one is prevention. So we give people access to our 360, health and TelaDoc. And the allied health services such as nutrition, nutrition, mental health, GP and specialist before they ever go on claim. The second way we manage that risk is through rehabilitation and retraining and our numerous programs. So basically getting them back to wellness, getting them back to health, and finally getting them back to work. And then the third way to manage that long term risk was, as we discussed before, through the capability clause. So for us, that was how we chose to manage that long term risk. Other companies chose management long term risk by going to an any occupation definition. Again, it’s making sure that from a MetLife perspective, we looked at this and said, We want to provide the client with certainty. So they can focus on the important things, return to health, return to wellness, then finally return to work without the goalposts being changed after two years,

Fraser Jack
it’s certainly an interesting part of the conversation around any known occupation. Now, I wanted to also realize your judgments before of course, there’s plenty of other levers involved with regard to with with regard to assessing the claim before you get to that any known occupation as well. One of the things that I use in that in that mix, one of those other levers, of course, is the percent that we haven’t covered yet is the percentage of the claim paid and and the varying percentages of claims.

Dr. Jeff Scott
Yeah, so I think this is there’s there’s two steps to this. So one is, what percentage of the person’s income gets replaced. And the APRA guidelines say that in the first six months, so the APRA measures stated in the first six months, you can replace up to 90% of the person’s income, then ask if the claim goes on for longer than six months, that is a maximum of 70%. So again, the question then becomes is that there are certain if it goes on for longer than a period of time? Do you then reduce that percentage to something less than 70%? So from a MetLife perspective, we looked at this and said, Does this manage the risk of the claim any better by doing this? And again, we looked at this and said, No, there are some organizations, some life insurance companies who said if you’ve been on claim for longer than two years, we’ll reduce the The replacement ratio from 70% to something less so 60% or something else. Again, we talked about what’s the best way to manage that risk. And we looked at it from those other three perspective prevention, rehabilitation retraining, and capability clause was a better way for us. So that’s the first thing. The second thing is what we call income tearing. So they say that we’ll cover 70% For the first 200,000. But then from 200,000 to 300,000, we’re only gonna cover 60%. And from 300,000 to four numbers out 400,000, it’s only 50%. And once you get above that amount, then we start reducing the percentage, rather than a straight 70% replacement ratio. So again, I have to speak from the company I work for, we do a straight 70%, up to your maximum of $30,000 per month. And that’s what we do with some of the other companies. Once you get above 200 $250,000 of income, your replacement ratio is something less than 70%. So the question then becomes is that when you sit down with your client, and you say to your clients, yes, it’s no longer 75%? It’s actually 70%? Well, it’s 70%. If you’re earning less than 200,000. If you’re earning more than 200,000, well, depending on which company we go to, it’s going to be less. So As Kathy said before, the differences between products, even with regards to income tearing also is quite significant. Yeah, exactly

Fraser Jack
right. And again, something else they have to throw into the mix when we’re looking at our our philosophies on how we’re going to make sure the clients covered John,

John Cachia
Jeff, one of the ones that actually interests me in regards to any unoccupied own occupation, there’s obviously a lot of experienced people even on here and probably listening to the podcast. And then there’s obviously some people that are just getting into the space, which we need to appreciate as well. When we’re talking about the difference between any and your own occupation. I like using myself as an example. So I’ve been in the industry for quite a while and nearly two decades, but a part of that process. So I had a stint as a courier driver, and I had a stint as a dishwasher. Okay, washing dishes at a local restaurant. So let’s say I couldn’t be a financial advisor, and I could possibly wash dishes or be a courier driver. And there are no Nokia or any occupation. Yeah. What’s the likelihood of me being able to continue to be paid? And that’s

Dr. Jeff Scott
an excellent question, John. And again, I, the only thing I can do is go back to what I’ve seen with case law. So with case law, what they say is based on your education, your training and your experience. So the question that they’d ask is, how long have you been a financial planner for? And you’ll say, I want to give away your age. So we’ll say, we’ll say a couple of years, they’ll then ask what type of training or education did it require for you to become a financial planner. And again, under the phase, your requirements in the new ASIC requirements, there is at least eight units you have to do sometimes more, but effectively is aq f7, or equivalent to a bachelor’s degree or equivalent, then there’s national exam and all the rest. So what they do is they when they look at education, training and experience, they look at all of this stuff. And based on previous case law, they would say, to get to a similar level of education, training and experience that you currently have as a financial adviser. What’s another equivalent role that you could do with minimal retraining. And so that’s what we see from the case law. Now again, we’ll see how this plays out at claim time, but that’s what they normally state. So if, again, I was, I used to work in a in a convenience store. So similar to a 711. I used to work in a, in a, in a supermarket similar to a Coles or Woolies, when I was a kid growing up, what type of education training experience does it require for both those jobs? Well, I need to be able to talk to customers, and need to be a stand up and stock shelves. So based on my current training, education experience, that would not be deemed to be a suitable role based on my current education training experience. That’s not significant. But the question then becomes, is there a similar role, and the similar rules are the ones that provide the ambiguity?

Cathy Kayess
And I think this becomes the hardest part of how we play this new space? You know, because we’ve already said, you know, different income percentage ratios that change over time. And then we throw in, you know, definitions that change over time, you know, I spoke earlier about I’ve just recommended my first one and just reminding myself that I need to go back and check that I have, you know, qualified all of these things in my reasoning, because it becomes quite difficult to make sure that if we are moving these clients from previous policies, you know, John talked about didn’t want to get a client away from an own occupation. But if the clients going back to you and saying, Hey, look, the premiums, you know, I can’t keep paying these At what point is the trade off that they have to look at an any suited occupation after a two year time period? Like, and getting the client to understand that, if they are on that long term claim, you know, what, what they have to deal with? You know, does that mean? Hey, look, you’re going to have a little bit extra in your trauma cover. Because we want to make sure that if you do go long term, you’ve got a bigger base of money to start with, you know, like, where do we trade off with a client? Where do we bring our expertise in and say, hey, look, you haven’t considered trauma, I’m recommending you trauma, because long term claims, I want to make sure you’re topping up your income, if you have one of those, those conditions, like there’s so much going on in this space. And educating the client to understand all of those things is, is it’s really difficult when it’s so technical, that there’s so many of us that are still struggling to understand it.

Dr. Jeff Scott
For alternative, Cathy, you just look for those policies that do have long term own occupation definition. So plant VEGF

Cathy Kayess
well done.

Fraser Jack
Serena? Yeah, a flow. One

Serena West
consequence that I think is going to come from all of these changes. And it circles back to some things that Jon’s been mentioning throughout, which is we do this to give clients certainty. You know, all of the work that we’re trying to do is to make things as certain as possible. And I’m seeing and hearing advisors thinking, okay, so if we have less certainty around the income, and we all accept that income is pivotal to the to the strategy and to all clients households, is then people increasing the levels of covering TPD and trauma. And then the flow and impact. So I’m kind of earmarking that I think TBD and trauma are the next cabs on the rank to be reworked, because I would expect there to be higher sums, insured, and then potentially higher claims. And you’re also potentially going to get these two tier system where you might be increasing an old TPD policy, which has a very different definition to a current IP policy, which has other definitions, and particularly if we’re looking across different companies, or across different reinsurers, it’s not going to be a simple outcome.

John Cachia
Yep. John. And this is the other issue you’ve got is that TPD also have limits. So when we’re talking about getting in there, and let’s say providing protection at an early age, and we’ve got to extrapolate the need for a client, do the need, and then we sit there and we go, hmm. Is there any providers who are going to allow for $4.8 million worth of income replacement? And it’s like, yeah, we’re going to struggle there. And so then you have to start trading off on those things. So yeah, Serena is definitely right. This is another area and I just I don’t without kind of trying to, there’s a lot of research that’s gone into this. But you know, there’s just so many kinds of flow on effects from these government changes. It just you start to obviously, question have these all been thought out? And yeah, very, very interesting. I think the certainty is the key factor when you’re talking about these any knock your own occupations. I think the percentages are an issue. But I think the more of an issue as well to about what that means to the lump sum covers. Yeah, what does that mean, and those increases that they happen, they’re not to say that they don’t affect the income protection they do. But it’s just that indirect or that direct correlation with the loss on campus.

Fraser Jack
Definitely, it all works together. And, of course, some behind this episode, and really behind this, that they are the idea of understanding how technically, these products work behind this behind the scenes, is the idea of sustainability and making sure that these products are going to be there and are going to be around for the time in the future when those clients need the most. So thank you very much, everybody in the panel for joining us in this particular episode, we really appreciate your your input. We look forward to jumping in and chatting to you in the next episode.