There’s been a huge spike in insurance claims, showing the importance of income protection
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Life insurer FMI saw the highest number of claims in its 26-year history in 2020, with claim volumes increasing by 17% compared to the previous year due to a sharp increase in temporary income protection claims related to Covid-19.
Minor infections were the leading cause of claims, accounting for 31.2% of all income protection claims paid in 2020. Most of these were due to Covid-19 infections and complications. Mental health claims, largely due to anxiety, burnout and depression, accounted for 3.5% of all claims, and was the second-most common reason for claiming on income protection, said FMI’s Chief Product Actuary, Leza Wells.
Presenting FMI’s 2020 Claims Report today, Wells said 87% of all claims paid in 2020 were for Income Protection benefits. In all, 7% of claims were for ancillary benefits such as Retrenchment cover; 3% were for Critical Illness and Life cover claims; and fewer than 1% were for lump sum disability claims.
“Covid-19 has had a major impact on the life insurance industry, with significant increases in claims for income protection, retrenchment, death and funeral claims. Whilst we saw a higher than usual number of Income Protection claims, our exposure to the virus was limited because we have a newer book with younger ages that have been underwritten more recently. There were limited claims on our critical illness lump sum and life insurance benefits,” said Wells.
“What the pandemic continues to show us is that Income Protection remains the most effective insurance against the risk of injury or illness. Minor infection claims due to Covid-19 accounted for almost a third of our income protection payouts in 2020 – and we believe this allowed our policyholders to continue providing for their dependents and employees during a highly unusual year which presented many financial challenges.”
FMI paid 92% of all claims made in 2020. Of the 8% of claims that weren’t paid, the leading cause of non-payment was that clients tried to claim under their income protection policies while still within their waiting period. In income protection terms, the waiting period is the number of days a policyholder must be sick or unable to work before a claim will start paying.
According to the Claims Report, 40% of claims lasted less than 30 days, with an average duration of 18 days for Covid claims. Claimants with a 7-day waiting period accounted for 86% of Covid claims. However, 64% of income protection policies sold had a waiting period of 30 days or longer. “This has highlighted the need for consumer education around concepts such as waiting periods to ensure that clients understand and select products that suit their needs,” said Wells.
It is important to note that only 2 of the top 10 claim causes for income protection were for conditions that would likely have resulted in a lump sum payout. Fewer than 1% of claims were paid on lump sum disability – which shows that there are a number of injuries and illnesses that impact your ability to work that won’t result in a claim on critical illness or lump sum disability cover.
Despite this, the majority of policies sold in the industry during 2020 didn’t include Income Protection. Lump sum benefits dominate sales in the life insurance market, with life cover representing 61% of new sales1. Lump sum disability and critical illness sales accounts for a further 32%, whilst Income Protection draws the short straw, with only 7% of sales.
“At FMI, we’ve always believed that Income Protection cover should be the foundation of your financial plan. Your monthly income pays for your short-term insurance, medical aid, lump sum cover, your savings and retirement plan. Even a short-term interruption in your income due to injury or illness places your entire financial plan at risk. For us, financial planning should start by asking: ‘How will I provide for myself and my dependents if I get ill or injured and I can’t work?’” said Wells.