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Income protection policies boost insurers

By Peter V O'Brien

Friday 7th April 2000

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Life office's individual income replacement, accident and trauma policies
Income replacement, accident and trauma insurance policies through the life insurance operations of the Investment Savings and Insurance Association (ISI) have been the fastest growing section of the broadly defined health insurance industry over the past decade.

ISI chief executive Vance Arkinstall said the vast bulk of policies were related to income protection. There was not a great increase in individual incomes from 1996-99 compared with earlier years and that related to the comparatively lower growth in income replacement policy premiums over that time.

"There has been an increase, because so many people are realising the importance of insuring their income against the risk of being off work through accident or major illness."

In the case of accidents, income protection policies generally provided a top-up benefit over ACC cover in the event of an accident. A policyholder could either insure income for a fixed sum or indemnify against loss of income.

"But, in any event, the insurer is not going to pay out a sum higher than the policyholder's recent income," Mr Arkinstall said.

Income protection policies have a clause to cover that situation. "The maximum that would be paid out is the maximum sum under the policy, or recent earnings history if less than the sum insured, and that is related to ACC benefits."

For example, a policyholder has been insured for $100,000 but recent earnings history show income of $70,000. Assuming ACC would pay 80% of recent earnings, the policyholder would receive $56,000. The remaining $14,000 to bring the policyholder's income up to $70,000 would be paid under the income protection policy, not the $70,000 and certainly not the $100,000 sum insured.

Mr Arkinstall said there would be no incentive for people to get back to work if they were able to get more than their recent earnings record, after allowance for ACC payments. The system outlined was a protection mechanism to ensure that didn't happen.

Insurers wanted to ensure they did not take on an unacceptable risk, which would be the case if the policy paid out the recent earnings record plus whatever payments were available from ACC.

Mr Arkinstall said there could be "hassles" with this, because people's income could drop and they may not get what they thought they would get under the face value of the policy. There could also be an issue with encouraging the getting-back-to-work approach.

Income protection and associated policies have been the fastest growing section of the life offices' business for many years.

Mr Arkinstall said that was consistent with Australian, US and UK experience, not only for individuals protecting their incomes but also for employer group schemes.

The figures in Table II should be read cautiously. It is invalid to divide the premium income each year by the number of policies in force to obtain an average premium for each policy.

A direct division would, for example, produce an average premium of $689 a policy in 1990 and $428 in 1999 but that could be comparing apples with pears.

Irrespective of movements in individual incomes over the past 10 years, it seems people with relatively high incomes were the first to recognise the need for income protection, coinciding with the time when this business took off.

The passage of time, coupled with growing awareness of the need for income protection as state-supported benefits were lowered or reorganised, brought more people into cover, with a probable lowering of the average premium per policy.

There could also be a relationship between age, dollar income and the necessary premium. Assuming, for example, a relatively high proportion of those seeking income protection in 1990 had, say, an average age in their 40s or 50s, with an average income of $100,000, they would pay premiums related to age and the level of protection, the latter based on actual income.

An increase in the number of policies from 23,646 in 1990 to 262,900 last year would have had to have come from a much broader demographic and income base than the situation assumed for 1990.

A fall in the average income protected would probably accompany a decline in the average age of policyholders. That would result in lower average premiums per policy.

The examples simplify the situation but the table's figures could have so many permutations that merely calculating average premiums in any year and comparing them with others is a sterile exercise.

Mr Arkinstall said the government's proposals for health were unlikely to affect the growth of income-protection and related policies.

"We are not aware of any proposals within the government's health plans that will influence this type of business one way or the other. It comes back to the fact that these products are not driven for health services reasons or costs but by the individual's desire to protect income."

Mr Arkinstall emphasised that individuals with these policies needed to review them regularly to ensure the benefits were consistent with their current earning levels, which is another way of saying people need to protect their investment in themselves as well as in other areas.

ISI Membership

  • American International Assurance*
  • AMP Financial Services*
  • ANZ Funds Management
  • Armstrong Jones NZ
  • Axa New Zealand*
  • Bank of New Zealand
  • BT Funds Management Ltd
  • Cigna Life Insurance NZ*
  • Colonial*
  • Direct Funds Management
  • Equitable Life Insurance Co
  • Farmers Mutual Group
  • Fidelity Life Assurance Co*
  • General & Cologne Life Reinsurance
  • Gerling Global Reinsurance
  • Hannover Life Re of Australasia
  • Medical Assurance Society NZ
  • Munich Reinsurance Co of Australasia
  • National Bank of New Zealand
  • Pacific Life Ltd
  • Royal SunAlliance Life*
  • Sovereign Assurance Co*
  • Swiss Re Life & Health Australia
  • WestpacTrust Financial Services NZ*

* Provide all of income replacement, accident and trauma policies. Other companies provide policies covering parts of the three.

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