Best Interest Duty in the new income protection world

23 November 2021

Benjamin Martin

Benjamin regularly presents at licensee professional development days, is actively engaged in regulatory working committees and authors papers across the various trade press platforms.

The recent changes to the income protection (IP) product settings has seen the market flooded with an array of new offers, with a high degree of variation amongst insurance providers.  As an adviser, it is difficult to know where to begin. All this has been compounded by an already challenging risk advice operating environment.

There is a school of thought that out of all the new IP policies currently on offer, the contracts with less restrictive terms will be in the best interests of clients. For some clients that may well be the case. For others, it may not.

As a starting point, keep an eye on price. All else being equal, a less restrictive IP contract will tend to be more expensive. Sometimes it may not be apparent when comparing Year 1 premiums. Your licensee policies may already require this, but consider cumulative premiums, even if only over a 5-year period as a base case scenario.

Indeed, a more expensive IP policy may be palatable for some clients. For some it may be perceived as a small price to pay for the more liberal T&Cs built into the contract. But a next generation on-sale IP policy that looks and feels like an old-world legacy IP contract isn’t always going to be in the best interests of a client.

Recall that the primary reason behind the October 2021 reset to IP product settings was that traditional IP policies were deep in the red, in part due to underlying T&Cs that acted as a disincentive for claimants to return to work. If, in this new world of IP advice, you’re recommending an IP product merely because its terms are less restrictive, then to what extent are those policyholders susceptible to the very pricing pressures that wreaked havoc across the retail IP space and caused APRA to intervene in the first place?

If pricing pressures within these quasi old-world IP policies do consequently emerge, naturally the policy is at risk of lapsing and the client may end up with no IP cover at all. Yes, this could be averted with a recommendation to replace the IP product beforehand, but to what extent will the client’s health condition at that point in time render replacement product advice unworkable due to loadings, exclusions and stringent medical requirements that may not have otherwise been imposed at the time of the original advice?

ASIC Report 413 – Review of retail life insurance advice, calls out the requirement to carefully consider how long the client wants to hold insurance, along with careful consideration of the client’s current and any foreseeable future health challenges. If we know a client has foreseeable future health challenges then how can an IP product that is more susceptible, on balance, to pricing volatility be in their best interests?

The changes to the IP space have complicated matters. The advisers we have spoken with that are beginning to make inroads are starting off on a first principles basis. They want to ensure that the next gen IP product they are recommending is sustainable and liberated from the structural pricing pressure points of the past. They do not want a repeat of the ad-hoc out of cycle rate rises of the past. That’s not only in the long-term interests of the industry, but the best interests of clients, especially if it mitigates the risk of having to replace a policy at a time when future health challenges may have materialised.

Learn more about AIA Australia’s new Income Protection CORE offer here.

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