Life insurance has typically been considered a recession-proof industry. This is partly because the need for insurance doesn’t go away during an economic slowdown – in fact, the need to protect yourself and your assets becomes top of mind, often prompting people to review their situation and take out cover they didn’t previously have.

It may also be because Black Swan events, things like pandemics and natural disasters, are usually listed as insurance exclusions, preventing people from claiming. 

Anecdotally, conversations I’ve been having with life insurance clients confirm they are in indeed seeing an uptick in people taking out disability income insurance, or income protection. This is presumably because people want to be covered in the event of coronavirus-related illness, and hopefully not because they think they’ll be covered if they lose their job.

While the onus has always been on advisers and life insurers to ensure the customer understands exactly what their insurance will cover, transparency and education is critical for new IP policies written during this crisis.

CoreData’s COVID-19 Consumer and Investment Pulse Check, which is tracking the impact of the crisis on Australians as it unfolds and reporting the results, suggests the rush for IP is likely being driven by concern about the impact of the virus on public health, with four in five people (81.5 per cent) anticipating COVID-19 will impact their personal health and well-being for up to 12 months.

IP pays up to 75 per cent of your pre-tax income for a period of time if you’re unable to work due to serious illness or injury. However, the policy only pays out after a specified waiting period, typically 30 to 90 days, depending on your cover. 

So while some life insurers have confirmed there are no exclusions for COVID-19 on existing cover, the waiting periods on policies are usually such that a person may well have recovered from the virus before the waiting period is over. That is, assuming they do recover.

A tsunami of mental health claims on the horizon?

What is concerning for life insurers, however, is the impact that COVID-19 is having on the well-being of Australians, many of whom are likely experiencing anxiety, stress or other mental health-related issues for the first time. 

The question marks over how long this pandemic will last; when social isolation measures might be relaxed; and the general fear about the ferocity of the virus have combined to form a cocktail of uncertainty that even the most resilient among us are having trouble swallowing. 

While the proportion of Australians experiencing anxiety has fallen over the last week to 32.6 per cent (from 36.8 per cent the previous week), more than half (52.3 per cent) say the crisis has had a negative impact on their mental health (down from 56.5 per cent), or that it’s negatively impacted their overall well-being (51.3 per cent, down from 53.6 per cent).

More than two in five (45.4 per cent) feel socially isolated and cut off from the rest of the world, stable compared to the previous week (45.7 per cent), and nearly three quarters (74.0 per cent) are fearful of the virus and its potential impact on their health and that of their family.

The life insurance industry can’t afford to see an uptick in mental-health related claims on IP as a result of this pandemic; the sector is already haemorrhaging money.

In the December quarter, prior to COVID-19 hitting Australian shores, APRA statistics show life insurers reported a $701.2m after-tax loss on individual IP, driven by adverse claims experience. Persistent losses by the sector prompted APRA to act in late 2019, outlining a range of sustainability measures intended to change the way insurers design, price and manage IP.

The potential for claimants to receive 75 per cent of their income while staying at home is a clear disincentive for returning to work, and the COVID-19-driven rise in unemployment will mean fewer jobs for claimants to return to, even among those ready and willing. 

It’s not clear to what extent the growth in new policy applications could offset any rise in mental health-related claims. However, the crisis has only intensified the focus on the sustainability of IP cover in its traditional form and has given further cause for life insurers to reflect on the best path for the future.