The knock-on effect of mental health claims on IP

The knock-on effect of mental health claims on IP

Mental health is becoming an increasingly important and relevant topic in the life insurance industry. As advisers you may be seeing this firsthand through client relationships and the types of claims being made.

Each day more information comes to light on the role mental health plays in the lives of Australians. In October 2018, the Government announced an inquiry to consider how mental illness affects a person’s quality of life including physical health, social participation, education, employment and financial well-being.

The outcome of that enquiry is the recent Productivity Commission Draft Report on Mental Health.1 It reveals that despite the fact mental health problems and suicide costs Australia up to $180 billion a year, services still fail to meet the needs of many people. The issue of stigma is also a factor – with many people too ashamed to seek help. Stigma amongst health professionals is another problem.

According to the Productivity Commission, which will release its final report in May 2020, sweeping changes to the mental health system are needed, including an increased focus on prevention and early intervention. More also needs to be done to help people get back to work and remain there. But until we see the rate of mental health issues decrease, it is likely that mental health insurance claims will continue to rise.


How does this affect insurers?

One of the most challenging things for Governments, businesses, service providers and individuals (i.e. everyone) is that mental health affects people differently. No one rule applies. A mental health problem can be triggered, or re-triggered, by a multitude of situations and interactions between variables…which makes it really hard to plan for. 

This is becoming increasingly apparent for life insurers. In fact, it’s probably no coincidence the retail life insurance industry recorded income protection (IP) losses of $1 billion in the nine months to 30 September  2019, pushing total losses over the past five years to $3.4 billion.2

Something has to give. For a start, the design and pricing of IP needs a rethink. Premiums are on the rise due to the volume and cost of IP claims, and the industry is losing money on the product.

But it’s so hard to price IP because life insurance companies need to price the risk for individuals whose circumstances (e.g. occupation, health) continue to change over time.  When these changes occur however, insurers can't simply re-rate customers or take their cover away. 
 
Life insurers also have future claims liabilities stretching out many years into the future, through economic cycles and changing trends, which they need to estimate today.

There are many variables for life insurers to consider including interest rates, investment returns, lapse rates and factors impacting claims like medical developments, economic conditions and mental health trends.
Given IP claims are paid out over a period of time, and not as a lump sum, it’s difficult to know when a person is likely to come off an IP claim.

Basically, it can be really complicated.

Mental health, as reflected in the Productivity Commission’s draft report, is also complicated. As an industry, we are faced with the challenge of finding solutions to a very serious problem.

ClearView is currently reviewing the design and pricing of ClearView LifeSolutions and assessing the viability and interest in a 'slimmed-down' and hopefully more sustainable IP product.

We will keep you updated on our progress.
 

1 in 2 Australians will experience mental ill-health in their lifetime but up to a million aren’t getting the help they need.1

Many who do seek help aren’t getting the level of care they need which has a knock-on effect.1

 
 
  1. https://www.pc.gov.au/inquiries/current/mental-health/draft

  2. Australian Prudential and Regulation Authority (APRA) statistics for year ended 30 June 2019