News & Thinking
The Government takes on the income protection insurance market
Last week, Finance Minister Grant Robertson announced the Government’s proposal for a universal income insurance scheme.
The “social insurance” would support New Zealanders who lose their job through no fault of their own, or need to stop (or reduce) work due to poor health or a disability.
The scheme was jointly designed by the Government, Business New Zealand, and the New Zealand Council of Trade Unions. It would apply to all workers in New Zealand. The full consultation paper can be viewed here.
A lot has been written over the past week on the merits of the scheme and the social good it hopes to achieve, today we want to highlight the effect of the proposal on New Zealand’s private insurance market.
The proposal in a nutshell
As currently proposed, the scheme would cover New Zealand citizens and residents who lose their job due to displacement (redundancy), or who need to stop working (or reduce their work by at least half) due to poor health or a disability. The scheme would not apply where someone resigns, or loses their job due to poor performance.
The scheme would cover full and part time employees (including casual employees where their work pattern resembles permanent employees) and fixed term employees who lose their job before the end of its term. Various options are being considered for self-employed people, with the likely option being that cover will extend to self-employed people who resemble employees (with all self-employed people covered for health and disability).
In order to receive a pay-out, workers must have contributed to the scheme for at least six months over an 18 month period before claiming. Only one claim could be made every 18 months. These rules should help reduce the risk of the scheme being abused.
Payments would be capped at 80% of prior income up to $130,911 (this figure would be adjusted annually), and paid for six months. A further four week ‘bridging payment’ would be paid by the employer. Payments wouldn’t be means tested, and wouldn’t be adjusted depending on a worker’s partner’s income, but would be taxed.
The scheme would be funded through levies on wages and salaries, and on employers. The initial levy proposed is 1.39% of gross income payable by both the employer and employee (2.77% in total). However, this is really just a best guess. There is uncertainty as to exactly how many New Zealanders are displaced each year or would claim due to a health condition or disability. Therefore, the actual cost of the scheme is unknown.
What does this mean for private income protection insurance?
In its current form, the scheme would inevitably lead to major change in the private income protection insurance market. Many people who currently have income protection insurance won’t need it, or at least won’t need all of it. However, with a six month time limit (and uncertain coverage of self-employed people) there should still be a place for private insurance.
The paper doesn’t explicitly acknowledge the potential effect on the private insurance market. However, it seems to justify this outcome by simply stating that “private income protection insurance markets are often neither efficient nor effective” and “tend to under-provide and over-price income protection”.
No evidence is provided for these statements, and we can’t help but wonder whether they may be overstated. Regardless, it’s certainly not as compelling as the case for ACC, where the alternative was for liability and damages to be determined through the Courts.
There are other options
Social insurance doesn’t need to be provided by the Government. It could be provided by private insurers under a more closely regulated model (with compulsion still likely being required). The paper acknowledges this, but only very much in passing. This is worth considering. Probably this would end up being similar to the competitive model for work-related accidents that was in place for a few years in the late 1990s.
Another possibility would be to allow workers with their own income protection insurance to opt-out, or apply their levies towards their insurance premiums. Unless we have missed it, these aren’t mention as options. Again, they are worth considering.
There is also the question of whether the scheme is actually needed at all.
Next steps – Have your say!
Submissions on the consultation paper are now open and close on 26 April 2022. The Government appears keen to move quickly on this. Subject to the outcome of the consultation process it anticipates legislation being introduced this year, and the scheme operating as early as next year. This means the scheme could be in place before the next election.
As always, our team is here to help you navigate what this means for you or your business – don’t hesitate to contact us!