Life insurance’s “paradigm shift” is accelerating

Produced in partnership with AIA Australia.

For an industry that’s often accused of being sleepy and slow moving, life insurance has experienced significant, rapid change in the past 10 years. The most obvious is the transformation of individual disability income insurance (IDII), which has returned to profitability after unprecedented regulatory action in 2019 led to the product’s redesign.

Since then, attention has turned to improving the performance of total and permanent disability (TPD) insurance, which has experienced a 38 per cent spike in claims since 2019.

Standalone TPD insurance was introduced in Australia in the 1980s to pay a lump sum benefit to people permanently unable to work due illness or injury.

For almost 35 years, musculoskeletal disorders, such as chronic back and spinal injuries, and diseases like cancer, and cardiovascular conditions, were the primary reasons for TPD claims, reflecting the product’s original purpose. 

However, over the past decade, mental illness has emerged as the leading cause of TPD claims. Research also shows that nearly 1 in 4 people successfully return to work within five years of receiving a TPD payout, throwing into question the product’s relevance and if it remains fit for purpose.

According to Damien Mu, AIA Australia chief executive, the industry is experiencing a “paradigm shift” with the physical conditions that have historically precluded people from work being dwarfed by the rise of subjective conditions such as mental illness and chronic pain and fatigue syndromes.

“For a couple of hundred years, the industry has dealt with known chronic diseases, but the increasing prevalence of mental health conditions has completely shifted the conversation around TPD,” he says.

In 2025, life insurers paid out more than $2 billion in retail mental health claims, almost double that of five years ago, according to the Council of Australian Life Insurers.

For AIA, mental health claims were the leading cause of claims across the board last year. The insurer paid out over $2.4 billion including $726 million in TPD claims.

The statistics highlight the changing nature of life insurance, which is increasingly nuanced. While broken bones, cancer, heart disease and death are black and white, neurological and mental conditions like depression and anxiety are grey.

Compounding the problem is that physical injuries and illnesses can spark mental conditions which may not become apparent for many years. This explains the long lag times for some mental health-related TPD claims, which can be submitted years after a physical diagnosis.

Assessing the permanence and severity of these conditions can be very complicated, which is reflected in increasing claim delays and disputes.

These challenges have also prompted changes to the eligibility and coverage of other forms of insurance including government schemes like workers’ compensation, as they too grapple with sustainability.

“We’re seeing life insurance and TPD morph into a form of financial support for people experiencing disability due to mental health issues or experiencing mental health issues as a secondary condition,” Mu says.

“Often there’s a delay before people lodge a claim because they’re trying to work with some level of impairment or utilising other forms of insurance first like WorkCover and income protection.”

Balancing speed and stability

Mu accepts criticism that the life industry has historically been slow to respond to calls for product innovation and premium stability, resulting in elevated lapse rates and a poor client and adviser experience.

“Advisers play a critical role in ensuring that Australians get the right level of cover in place to protect themselves and their families, but the industry hasn’t made their jobs easy in the past few years,” he says.

“Ongoing premium increases have created extra work and issues for them, but we’re really listening now and their support has been essential in helping us develop products that are fit for purpose and meet their clients’ needs.”

AIA is wasting no time expanding and enhancing its range of insurance solutions. It was one of the first insurers to launch a new IDII product, following the Australian Prudential and Regulation Authority’s intervention.

Similarly, in 2016, it launched TPD Assist for Sunsuper (now part of Australian Retirement Trust), which replaced lump sum payouts with structured annual instalments to shift the focus to early intervention and rehabilitation, and make cover more affordable to members.

While AIA isn’t first to market with its revamped TPD product, Mu says the design of AIA TPD Core required a “cautious and considered” approach.

“If we came out quicker, we wouldn’t have properly addressed the fundamental issue of a paradigm shift in the types of injuries and illnesses behind TPD claims,” he says.

“We took our time to really understand the complexities and consider feedback from advisers and customers around what they needed to get confidence again including clarity on what’s covered and what’s not, and how conditions will be assessed.”

A distinguishing feature of AIA TPD Core is its clear treatment of specified conditions including mental illness. Mental conditions are subject to an assessment under the Psychiatric Impairment Rating Scale framework and must have a minimum severity rating of 31 per cent to be considered a severe functional impairment.

“The main challenge with TPD is not diagnosis but determining if a condition is genuinely permanent because subjective conditions can have symptoms that are fluctuating or episodic,” Mu says.

“TPD Core has clear requirements for specified subjective conditions so there’s greater transparency of how severity and permanence is assessed and the evidence needed.”

“An important benefit of this product design, which includes a five-year rate guarantee, is that it provides greater stability and premium certainty.”