- On August 9, 2017
When industrial superannuation was built into a wide range of industrial awards 30 years ago, the initial employer contribution was 3% of wages. All funds provided life insurance and most had a flat premium for members of $1 a week, with benefits declining by age in line with the underlying increase in risks.
Over the last decade, group insurance has become more sophisticated and premiums have increased to levels more like $4 to $6 a week for default insurance. Today, the superannuation industry is the leading provider of death and total & permanent disability insurance in Australia, accounting for more than 70% of all life cover ¹.
Furthermore, the increase in universal default life insurance for employees, together with the ability to purchase additional cover, has dramatically reduced the gap between the community’s financial needs and the amounts of insurance. Many workers receive insurance well below the levels they would pay for retail products – and some are in occupations where they might not be able to otherwise get insurance on favourable terms if at all.
Overall then, the group insurance market is one of the success stories of our modern superannuation system.
Despite this achievement, there has been negative media coverage around life insurance, including criticism of:
- Claims processes, questioning whether trustees/insurers have been fair.
- Problems with people being members in more than one fund and having too much insurance.
- Over-insurance of young members.
- Expensive cover at older ages which erodes retirement balances.
Last year, the key industry bodies formed the Insurance in Superannuation Working Group which is addressing these and other issues. It has set out the objective of insurance in superannuation to be:
to provide a measure of financial support to members and their families if the member is prevented from working to retirement age by death or ill-health.
Outside the life insurance and superannuation industries, there does not appear to be the same support. The Financial System Inquiry recommended that there be an overall objective for the superannuation system, and it also listed some ancillary objectives. Everything made sense – but there was nothing about insurance!
The Productivity Commission Inquiry into the superannuation system set out its own five objectives for superannuation, one of which was that the system provides value for money insurance cover without unduly reducing member balances. On 30 June, the government provided a revised brief for the Commission and asked it to consider the appropriateness of insurance arrangements within superannuation.
A week later, the Minister for Revenue and Financial Services, the Hon Kelly O’ Dwyer set out further reforms to give consumers more power over their superannuation. Amongst the changes, was a request for APRA to make it easier for consumers to opt-out of automatic life and disability insurance policies provided through superannuation.
The industry has already reacted to the public criticism. Insurers and funds alike are looking at developing practical solutions to all the problems. As an example, AustralianSuper and Cbus have reduced their cover for young Australians so that they are not over-insured.
Rice Warner believes that life insurance should remain an integral part of the superannuation system. We believe it would be possible to design insurance cover which is closer to the financial needs of members. Generally, insurance needs grow with the number of dependants in a family. Table 1 shows the percentage of the population with different family sizes and gives examples of insurance needs for these groups at different ages.
Table 1. Proportion of population by age, social status and respective insurance needs
Funds could address potential affordability concerns by designing insurance products more around member characteristics, such as age and family type. Using the above statistics, we could shift the default sum insured to one based on needs – all without changing the premium or getting any additional information from members. We would simply assess the amount of the claim based on the dependants at the time of death.
Table 2. Proposed death cover amounts by age and family type
The industry has begun to respond to the questions that are being raised. Recently Cbus has announced that they will begin their own crackdown on young people paying unnecessary premiums for superannuation. Other industry funds such as HOSTPLUS and First Super have been working to reduce the cost of insurance without compromising cover.
Progress is unlikely to be quick on this front as typical insurance contracts are for three years. Funds will likely have to wait until they can renegotiate. By then, we expect that any further pressure applied either via government or the media will already have prompted change without the need for further legislation.