Voluntary Insurance – Are More Risk Controls Needed?
- On 09/11/2016
With group insurance claims experience being higher than had been expected over recent years, superannuation fund trustees have been reconsidering benefit designs and policy terms in order to ensure sustainability of the fund’s insurance arrangements.
One of the key insurance risks is the risk of anti-selection by a small number of members which results in higher premiums for all members. This commonly occurs where members are able to obtain cover without needing to provide medical evidence.
One of the reasons that funds are able to offer affordable cover to their members is the fact that cover is available without underwriting. This makes it an important feature to retain. Default cover on joining the fund is generally provided without evidence of health, for simplicity and because it has long been recognised that members who are first provided cover when joining an employer tend to be low risk as new employees are expected to be in good health. Further if all new employees receive the same level of benefit or the same benefit formula (subject only to age or salary differences) this reduces the risk of anti-selection.
Since introducing insured benefits many funds have been able to obtain generous options for their members from their insurers such as taking up additional cover without underwriting in several situations such as:
- On joining the fund (sometimes regardless of whether they are commencing new employment).
- On the occurrence of certain “life events” such as marriage, birth of a child.
- At certain ages or periods of membership.
- When transferring cover from another fund.
Many of these features were introduced when the underwriting process involved members completing long forms sent via traditional mail. Processes are now simpler and quicker with most insurers offering electronic underwriting and the use of the telephone to clarify issues. It may be time for funds to cease offering cover above default except where at least some evidence of good health has been provided.
The ability to take up the above offers differs by types of funds. The following graph for example shows the proportion of funds offering additional cover without underwriting on joining the fund. The data has been obtained from Rice Warner’s group comparator and tableau software.
Overall Industry funds can be seen to be more generous than master trusts in providing additional cover without underwriting. This can increase the exposure of industry funds to an anti-selection risk, which in turn can lead to a worsening experience for the funds.
Few exclusions apply to death and TPD cover. For voluntary cover that has been subjected to underwriting, individuals may be offered cover subject to individual exclusions based on their medical history or pastimes. There is however a risk that members may take out cover with the intention of making a claim. Whilst underwriting may pick up existing illnesses, it is more difficult to determine which members are at risk of self-harm.
Suicide claims are frequent, particularly amongst male members as demonstrated by Rice Warner’s 2014 claims experience study covering years 2010-2013.
These results can be compared with population wide data from the ABS Causes of Death studies (2014) as shown in the below table.
* The female and male rates from the ABS study have both increased slightly from those shown in the 2010 ABS study, showing rates for females and males of 4.8 and 16.4 respectively.
Many funds have mitigated the selection risk by applying a suicide/self-inflicted injury exclusion on member-selected cover for the first 12 months that the cover is in place. The risk of a member taking cover out in order to claim for this reason is expected to reduce considerably after this period.
The following graph uses data from Rice Warner’s group comparator to demonstrate the proportion of different types of funds that apply this exclusion:
A significantly higher proportion of industry funds are exposed to anti-selection from this option than mastertrusts. This is an issue that has been considered by many trustee Boards. Some have decided that it is in the best interests of all members to restrict benefits on suicide as the cost of the insured benefits paid following a suicide are effectively met from premiums paid by other fund members. Others have decided that benefits should not be resticted as this is reducing benefits to the families of the former members at a time of great loss.