One in five Australians aged over 15 will be affected by a mental health condition.
Life insurers should rethink product offerings to cope with an onslaught of mental health-related claims, with some lump-sum policies offering “perverse incentives” for customers to prove they will never be able to work again, rather than try to return.
That is the view of the Actuaries Institute in a report to be released on Thursday, which found the insurance sector could improve its product design and claims systems for dealing with mental health coverage, which is leading to “real challenges” to its sustainability.
“Products that pay significant lump sums, such as total and permanent disability insurance, provide perverse incentives, since they rely on a person establishing that they are permanently unable to work,” said the report.
“These may be less appropriate for mental health conditions than income stream products, which assume that an eventual return to work may be achievable.”
About 70 per cent of Australians have insurance for death and often TPD provided through their superannuation funds, with no individual underwriting and a “simple” employment test to qualify for cover.
In the year to March 2014, group insurers experienced major increases in TPD claims, and in this period group insurance cover made a loss of almost $500 million.
More recent data from the Australian Prudential Regulation Authority showed that in the year to June 30, life insurers lost $53 million on retail life insurance policies. Group risk, the type of product offered via superannuation funds, made an after-tax profit of $28 million.
Geoff Atkins, a principal at Finity Consulting and one of the authors of the report, said research showed if a person is entitled to a lump-sum benefit, their health outcomes are worse.
“There is always a delay in resolving the claim, which means that a person has an incentive to stay sick. Just having to go through the long process with multiple medical exams to get a lump sum is stressful and causes anxiety for some people,” he said.
“People with mental health conditions often say that having to retell their story to doctor after doctor is re-traumatising, and makes their resilience worse.”
Brett Clark, the chief executive of Australia’s largest life insurer, TAL, said it and other life insurers provided income-based benefits for disability and permanent disability products, which give lump-sum benefits, both of which cover mental illness.
“Mental illness is not a straightforward condition and you need to be conscious of the merits of each case. To say to someone who has a mental illness that ‘you are permanently disabled and in our assessment you can never work again and here is a lump sum benefit’ – that is a difficult conversation and it is not always the best interest of the customer to hear a message that you are permanently disabled,” he said.
“It’s not so much about whether the benefit is paid as an income stream or a lump sum, it’s around the message that you are permanently disabled and can never work again.”
The Actuaries Institute report said group insurers recognise lump-sum payments may not be the best way to support people.
“Many group insurers are adopting strategies to help people claiming to return to the workforce. Some also offer alternative product designs for TPD insurance, paying benefits by annual instalments,” it said.
“Such policies, which may be offered as a default or as an opt-in policy carrying a lower premium, may be a better way of meeting the needs of those unable to return to their former work roles due to a mental health condition.”
This piece was first seen on ‘The Financial Review’ 18 October 2017.