The August issue of Actuaries discussed the issue currently facing TPD insurers. The article provides a good synopsis of what has occurred. We now need to work out what should be done about it and this is an area where, with our product design skills, actuaries should be able to help.
Insurers pay claims based on the terms and conditions of the policy which they have sold. Over the last three decades there has been a gradual shift in the legal environment such that challenges to insurer decisions are the norm rather than the exception. There is no value in us blaming lawyers for doing their job. The recent judgement of Hannover Life Re v Colella in the Victorian Court of Appeal is an example of how the court will interpret a policy and the insurer’s obligations in a way that is clearly different from the expectations of the insurer about how the system does (or should) work. We will need to take a ‘whole of system’ approach.
Comparisons of TPD with Workers Compensation (WC) and CTP experience are often made. In WC and CTP, the conventional wisdom is that early intervention and active psychosocial support can reduce claim numbers and their size. Evidence shows that the intervention needs to be in the first few days to be effective. A basic problem with TPD is that the very nature of the cover means there has been no relationship between the claimant and employer for at least six months, and the insurer has no knowledge of the possible claim for at least this period. There is no relationship between insurer and former employer, no statutory obligations on employer or claimant, and the employer does not have a financial incentive to mitigate costs (like it does for WC).
All of the above point to issues with the design of the TPD offering. Now that the genie is out of the bottle, I doubt that changes in price, underwriting or claims handling will return the market to a stable situation. In short, the TPD product needs to be rethought. It is time to reflect on the need which TPD insurance is intended to satisfy and how well it currently meets this need. There are already WC, CTP, NDIS, disability income, personal accident products, etc. which overlap with TPD.
Returning to the current situation, TPD claims will not keep rising at the current rate forever. At some stage a saturation point is reached, and any interventions in the meantime might change this trajectory. Will we be able to spot when the claims have peaked? Arguably, actuarial techniques did not recognise this problem at an early stage. Unless there are changes in techniques, they also may not recognise when the experience turns for the better. Geoff Atkins and I shared our thoughts at an Insights session on the modelling issue, and certainly there are more ways that performance monitoring can be improved.
We have certainly been in this spot before, WC in the 1980s, CTP in the 1990s, and liability at the turn of the century. At each of these times, substantial legislative changes were made that changed the coverage given. I suggest that more action than increasing premiums and actively managing claims is required to resolve the TPD issue, and the starting point is to understand the value proposition of the TPD product.
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