Mental Health Claims Push Insurers to the Limit

Australia’s life insurance industry is under mounting pressure due to a significant rise in mental health-related claims. This trend is putting the long-term affordability of coverage at risk and forcing insurers to reconsider traditional policy models. In 2024, payouts reached $2.2 billion, nearly double the $1.2 billion paid just five years ago. Insurers warn that this growth, particularly among younger Australians, threatens the sustainability of life insurance offerings.

The increase is largely driven by mental health conditions such as anxiety, PTSD and depression. Once a relatively small category, mental health now accounts for the largest share of total and permanent disability (TPD) claims. Since 2013, TPD claims related to mental health from people in their 30s have jumped by 732%. In 2024, 44% of total life insurance claim payouts were linked to mental health issues, up from 25% in 2019.

Many of these claims are lengthy and complex, sometimes involving traumatic events that occurred more than ten years ago. To manage these cases and encourage earlier claims, some insurers are considering introducing a limit of six to seven years for claim eligibility. Additionally, they are exploring alternative payment structures such as tiered or staggered models which may better suit the unpredictable path of psychiatric recovery compared to the more permanent nature of physical disabilities.

Even as these models are still being discussed, the impacts are already evident. Some policyholders have seen annual premium increases as high as 50%, although most hikes range between 5% and 40%. Analysts believe there is a clear connection between the rise in mental health claims and the corresponding jump in premium costs. For some insurers, mental health conditions now account for 40% of TPD claims, contributing to increased pressure on both customers and the broader system.

This trend is not limited to private insurers. Public sector programs, such as New South Wales’ workers' compensation scheme, have experienced similar claim patterns. In response, governments are moving to tighten eligibility criteria. Yet industry experts suggest that life insurance itself must change, especially when mental health is involved. One proposal includes hybrid payment systems that adjust as a claimant’s work capacity improves, acknowledging that psychiatric recovery often follows a non-linear course.

These challenges have prompted urgent calls for national coordination. The Productivity Commission estimates that mental illness costs Australia up to $220 billion each year. At the same time, about 500,000 people cannot access adequate support through the NDIS. Public and private systems are both reaching capacity. Insurers now face the difficult task of providing fair and equitable access to cover while maintaining financial sustainability.

Source: Australian Financial Review, KPMG, CALI, TAL