Melinda Howes, KPMG.

Total and permanent disability (TPD) insurance needs a fundamental rethink, according to Melinda Howes, superannuation and insurance partner at KPMG.

Speaking at the Investment Magazine Group Insurance Dialogue in Sydney last month, she said: “If you look back to when this type of coverage was conceived, we’re in quite a different time. Workforces were more dangerous.

“If you got injured, very often you weren’t coming back to work. Medical care wasn’t where it is now and the types of workplaces were much less safe than they are today.”

While there were still high-risk workplaces and high-risk occupations, Howes said a much bigger proportion of the Australian population was now in quite safe and largely white-collar work environments.

TPD challenges

David Evans, head of insurance at Aware Super, noted that the complexity of TPD terms was a challenge for the industry.

Over time, he said a proliferation of different TPD definitions had developed, some of which had become subjective. Plus, many trustees had grandfathered terms over the years, creating confusion among members as well as operational risks.

Evans listed “soft triggers” as another challenge. This occurs when members don’t necessarily have confidence in the cover they have because it depends on their circumstances at the time their claim is assessed. It could, for example, be affected by the number of hours someone was working before the claim event or the person’s age.

Evans added that there was much the industry could do to take friction out of the claims process, such as making it as simple as possible for claims to be lodged, making the assessment decision process quicker and doing a better job of monitoring and collecting data.

Lump sums vs instalments

Howes questioned whether the lump sum TPD pays out was really fit for purpose anymore given that people now had a much better chance of coming back to work after treatment and rehabilitation, thanks to improved modern health care.

She welcomed comments made at the annual forum about moving to a blend of payment types, including lump sums for more severe illnesses or injuries.

However, Evans said a survey of Aware Super’s members found they valued TPD insurance and the provision of a lump sum benefit.

“So, the industry can talk a lot about the challenges of the current model, but I think we also need to recognise from a member perspective, it gives them confidence that should something dramatic happen, there is a benefit that will be payable.”

Aware Super’s survey also picked up some scepticism from members around paying TPD benefits in instalments and concerns about what conditions may be imposed for them to receive those payments.

“Members also wanted to do things to improve their health,” said Evans. “They wanted to be able to take advantage of services so that they could help manage health issues in a proactive way. And they wanted to be able to do that without necessarily even needing to make a claim.”

Tough times

Howes noted that group cover was pretty much at the bottom of a loss cycle that kicked off in early 2020.

“It looks like we’ve bottomed out and are starting to climb back up to profitability,” she said, noting that losses have primarily been experienced in TPD rather than the death side.

She said there had also been a big dip in insurance coverage of members since late 2019 or early 2020. “The number I’ve heard … was we’ve gone from around 80 per cent coverage of super members to around 50 per cent and that’s certainly being reflected in the premiums coming through.”

This led her to ask whether at some point the ability of super trustees to continue to automatically cover members might be affected.

“As any risk analyst will know, you need to have decent coverage of a large proportion of members to be able to be confident that you’re not getting any selection and only having the sick people with cover. And then you get into a very negative spiral of increasing costs for everybody.”

Howes also noted that the economic downturn seemed to be biting quite hard. “This is when claims go up. And every time there’s an economic downturn, we see this effect.”

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