Stuff has an opinion piece by Jessica Wilson which appears to condemn income protection insurance as a low value insurance product. That’s not the case. In fact, claims payments in income protection make it one of the least profitable products for insurers: a strong indication that consumers are getting the better end of that deal. My review of Wilson’s article is here:

“Among the latest offerings to emerge are income protection-style policies designed to appeal to the financial insecurities of renters.”

The insurance industry is guilty as charged here. Although it does not exclusively appeal to younger clients. For income protection it appeals pretty much to people in work – although it does prefer people in safer work.

“As with most income protection policies, cover is limited to situations where you become sick or injured and can’t work (there’s no payout for redundancy). And it doesn’t kick in straight away.”

This makes it sound like that’s a big limitation. It isn’t. Most of the things that keep you from working are sickness. The first month is often well covered by your employer. Hence the wait periods – as insurance is about compensating for a loss, not creating a prize or moral hazard. Redundancy, of course, also does not necessarily create a loss – some people are back at work quickly. But also, redundancy cover is available as an optional add-on with many income protection policies, also not mentioned by Wilson.

“The lifetime costs of the cover – that’s the amount you’d pay in premiums for the duration of the policy – are rarely disclosed. Premiums will increase with age, and if you cancel after a few years because costs have gone up, there’s no refund.”

Insurance is a pooled risk product: the lucky who don’t claim are paying for the claims of the unlucky who do. It isn’t a savings product, and this is always made clear. This limitation is also present in the car insurance that Wilson later compares income protection and its no problem.

“…these policies can be marketed to people who are the least likely to need them – single, young professionals with no dependents.”

Insurance is priced for risk – because they are less likely to claim, their premiums will be a lot less.

“Available data indicates that workers who leave their job due to ill health or injury are likely to be 55 or older, on a low income and live with a partner. Notably, age limits set by the insurer can mean people 55+ aren’t even eligible for cover.”

What annoys me most about this article is the above paragraph. The linked document contains NO claims data. The document was prepared without the participation of the insurance industry, which has decades of data on claims and regularly publishes a quarterly summary of claims data (for example: https://blog.fsc.org.nz/life-insurance-industry-spotlight-december-2021 ) The document to which Wilson links even explains the lack of the data in the document:

“Estimating the costs across the whole workforce is much more difficult because we cannot be sure how many people would claim insurance due to either displacement or a health condition or disability. Our current data on displacement and health conditions is limited…”

But to return to the criticism that insurance is not available for those over 55, while it is true that age limits ‘can’ mean older people are not eligible for cover this obscures the fact that most income contracts do offer this: Insurance policies must, of course, be taken out prior to the insurable event occurring, some have a maximum age of entry of age 55, some go to 60, but coverage is usually to age 65 or 70.

Wilson refers to the conduct and culture review of 2019. While some insurance products are not great value for money, neither is fast food, yet it still has a place in the market. It also accounts for only a small fraction of all food sold, as it should. If we talk about fast-food, or fast-insurance, it is easy to overlook the point (it’s quick) and focus on only the problems. We know a proper meal is better than fast-food. In the case of insurance, taking advice from a Financial Advice Provider and getting a fully underwritten plan sorted out.  I need to make it clear, the products named as poor value in the conduct and culture review are not income protection.

However, Wilson proceeds to talk about claims ratios for these different products.

“The claims ratio can be as low as 10% for some policies on insurers’ books – meaning just 10¢ is paid out to customers in claims for every dollar the insurer earns in premiums.

That’s the case for credit card repayment insurance, a product regulators here and in Australia have slated as “poor value”.

If anything, our regulator has the opposite problem with our income protection: the worry is that it probably pays out too much when long-term claims are taken into account. Indeed, in Australia APRA has limited insurers’ income protection insurance products because of concerns that high claims make the product not sustainable. Quite the reverse of the implications of Wilson’s comments.

In conclusion: insurers have been keen to participate in the review of industry conduct and culture and have welcomed most of the proposals for reform. Even now the insurance industry spends considerable time and effort to engage with government, journalists, and the public on the issue of claims, cancellations, and payment ratios. One insurer, Partners Life, even placed huge quantities of data in the hands of journalists for external review. The sector pays over $300m in claims every quarter – more than $100m a month.

In fact, the insurance sector has been calling for the update to insurance laws due to come in the Insurance Contracts Bill. The fact that it has taken so long is not the fault of insurers – government has found other priorities in each of the years since the last major update in 1985.

You can refer to Wilson’s article at this link: https://www.stuff.co.nz/business/opinion-analysis/129276476/the-poorvalue-insurance-policies-youre-probably-better-off-without