The benefits of targetted early intervention

Cadence Economics recently published a report for the Financial Services Council estimating the benefits of targeted early intervention by life insurers that might result from reforms currently being considered by the Parliamentary Joint Committee on Corporations and Financial Services.

Many Australians insure themselves against economic losses associated with mental and physical disability either directly or through group insurance in superannuation. This insurance comes in a variety of forms, such as total and permanent disability insurance (TPD) or income protection (IP) which is insurance for temporary incapacity.

The regulatory environment in which these policies operate is complex, and there is a growing realisation that certain constraints in the current system are potentially leading to sub-optimal outcomes.

We were commissioned by the FSC, co-sponsored by BT and Metlife, to undertake economic modelling that might result from reform. This analysis was undertaken through the construction of a model that considers the impacts of reform on individuals wellness, the insurance sector, government expenditure and the wider Australian economy. This analysis formed a component of the FSC's submission to the Parliamentary Joint Committee on Corporations and Financial Services.

We found that early intervention results in faster return to work times, estimated to improve by five weeks, from 18 weeks to 13 weeks, and the prevention of 8 per cent of people with injuries from transitioning to total permanent disability. In terms of the economic benefits, there were two main impacts on the overall economy.

First, there is an effective increase in labour supply as those on income protection (IP) return to work faster, and a number of people do not go on to permanent disability insurance (TPD).

Second, there is an improvement in the government budget position resulting from the direct spending on health services for those affected persons. The reduced cost to government was estimated to increase over time as the benefits cumulate over a greater number of people.

Overall, by 2040 the projected increase in real GDP impact was estimated to be $405.7 million, representing approximately $169,000 in real GDP per additional full time equivalent worker in the labour force.

Taking the projected benefits of reform over this period, Australian real gross domestic product (GDP) was projected to increase by $1.56 billion in net present value (NPV) terms.

Over the period 2019 to 2040, the government was estimated to save $1.12 billion in net present value terms as a result of reduced spending on health.

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