APAC / Consumers/retail / Current events / Insights / Risk

A financial cliff awaits Australia’s ‘pay later’ economy

The coronavirus crisis has added a new dimension to the buy now, pay later economy, with many Australians and business owners heading towards a financial cliff they can see but can’t avoid. 

In taking up the various opportunities available to defer debt obligations during the pandemic, Australians have effectively signed up to a form of AfterPay on a grand scale. 

With JobKeeper and the fortnightly JobSeeker payments due to end on September 27, there’s a real risk that the income position of those relying on the stimulus to get by will have worsened, right at the time they are required to start paying back their debts.

CoreData’s COVID-19 Pulse Check of nearly 4000 Australians found 8.6 per cent of Australian home owners had taken up the mortgage repayment “holidays” being offered by the banks as at late May, with a further 16.2 per cent expecting to have to do so.

That mortgage relief is no doubt a lifeline for many struggling with the impact of coronavirus-induced income loss, but could be leading some people towards negative equity by capitalising their unpaid interest over the six month “holiday” period.

While the low-rate environment will reduce the interest accruing on the principal loan amount, the interest added to the outstanding loan balance means borrowers will have to either increase their repayments or make them more frequently when the holiday ends.

But mortgage relief is just one of the “pay-later” hardship measures available to Australians during the crisis. 

Life companies at risk of increased lapses, IP claims

Life insurers are likewise being encouraged to provide relief to policy holders in distress, in the form of deferred life insurance premiums.

In a letter from ASIC in late April, life companies were told to consider, “where appropriate and reasonable”, going beyond the hardship provisions of the Life Insurance Code of Conduct and “reviewing options for premium ‘holidays’ or deferrals” for those who can’t pay premiums due to reduced income.

Given the relationship between unemployment and lapse rates, it’s in insurers’ interests to give people the ability to defer their premiums and retain the cover. And while it’s also in consumers’ best interests to retain the cover, a deferral only serves to escalate financial pressure at some point in the future.

When this pressure comes, the life insurance industry may find themselves experiencing an increase in lapses due to high unemployment – Treasury continues to expect the unemployment rate to reach 10 per cent – at a time when they’re already under financial strain.

The quarterly APRA life insurance performance statistics for the March 2020 quarter, published on May 28, shed light on the tightrope life insurers continue to walk in balancing the need to shore up their bottom line with higher premiums, and the reluctance of consumers to pay for an insurance they need but don’t want.

Net loss after tax for the industry was $1.8 billion for the year to March 31, 2020, compared to a profit of $759 million in the previous year. Poor performance across all risk products except individual lump sum was exacerbated by a collapse in investment revenue due to COVID-19 related volatility.

A whopping 85 per cent, or $1.395 billion of the combined $1.644 billion loss on risk products was attributed to income protection, which continues to be plagued by an adverse claims experience that APRA’s December 2019 intervention aimed to address. 

As previously reported, COVID-19 is having a severe negative impact on the mental health and well-being of many Australians, some of whom are likely experiencing anxiety, stress and depression for the first time in their lives. Given this, there is a strong chance that life insurers will see mental-health related IP claims escalate on the back of COVID-19, putting further pressure on their books.

Businesses face mounting debt, too

Click on the laptop to see the CoreData
COVID-19 Pulse Check Dashboard

CoreData’s COVID-19 Pulse Check research found more than one in five (21.6 per cent) people have lost income as a result of the virus, while 12.7 per cent report having lost their job.

Banks, utility companies, local governments and landlords are all providing financial hardship assistance in the form of deferral of fees and payments in an effort to help people keep their heads above water. 

It’s not unfathomable that a person who has lost their job during this time would avail of the chance to defer their mortgage, life insurance premiums, rent and utilities, amassing a level of debt that would prove difficult to pay back even in the event of a return to their pre-COVID-19 income levels.

Not to mention the possibility that they’re deferring their retail expenditure too, with AfterPay reportedly attracting one million of the nine million Americans that have joined since the pay-later platform launched in the US two years ago during the 10-week pandemic lockdown.

And kicking the debt can down the road has very real consequences for Australian businesses too. 

The latest Treasury statistics reveal nearly one million businesses have enrolled in the JobKeeper program as at late May. Of these, 759,654 had made claims in relation to their eligible employees and had their applications processes. A further 150,000 enrolled businesses are yet to complete their employee declaration.

Without JobKeeper, Treasury expects the unemployment rate would have been about 5 percentage points higher, and while the scheme is expected to keep some 3.5 million Australians in jobs, it remains to be seen how many will retain these jobs when the payments cease. 

This question mark is largely due to continued uncertainty over how small to medium enterprises that deferred debt obligations such as rent, utilities and financing costs when restrictive trading was imposed will cope when the stimulus tap is turned off.

Just like individuals, business owners will be required to start paying back deferred obligations come October. 

SMEs will be given at least two years to catch up on commercial rent payments under a mandatory code of conduct for tenants and landlords introduced in April in response to the virus. However, the country is widely expected to enter recession this year, so these obligations will be repaid during a period of continued economic uncertainty likely to hamper business profitability.

In reality, individuals and businesses are likely to be shouldering the financial burden of this virus for many years to come, and for some, the weight of debt will be too heavy to carry. 

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