The Actuaries Institute has called for immediate action to reduce the burden of mental illness on the financial safety net that includes private life insurance and state-based workers’ compensation.

It warns the ability to deliver effective support is being challenged by strains on the “complicated patchwork” of funding sources, service providers and administrative structures.

The safety net provides at least $18.5 billion a year in direct funding for mental health treatment or income support, the institute says in a report.

Of that, nearly $4 billion comes from insurance – $2.2 billion from life cover and income protection, $900 million from workers’ compensation and more than $650 million from private health cover.

The report says while insurers have made strides in funding for mental ill health in recent years, sustainability is far from ensured.

In the total and permanent disability individual insurance line, annual mental health claims increased 433% from $39 million to $208 million between 2014 and 2022, the report says, citing KPMG.

“While it’s positive that this life insurance benefit is responding to genuine community need, spiralling claim rates worsen affordability and pose a wicked problem given the voluntary take-up of individual life insurance,” the report adds.

“Insurers continue to wrestle with difficulties of providing affordable insurance cover for mental health that continues to meet community expectations.”

Redesigning insurance products is among eight measures proposed in the institute’s report, titled Mental Health Financial Safety Net, Unifying Australia’s Fragmented Systems.

The report says insurers should consider ensuring the insurance benefit is not excessive when compared with the financial loss; refining strategies to balance the mix of lump sum and income stream payouts; and promoting a fair, efficient and contemporary experience for consumers.