- On January 12, 2017
All MySuper products and many Choice products provide death and Total & Permanent Disability (TPD) cover. Some funds also offer income protection (IP) products which pay an income to partially replace wages on becoming disabled. The disability cover has received considerable media attention recently and this has led to significant analysis and review from superannuation funds and their insurers (and reinsurers) on several key issues.
The high rate of return to work by successful TPD claimants
A study by SunSuper showed that about 36% of successful TPD claimants were returning to work following recovery from their disability. Other funds reported similar results without the same detailed analysis carried out by SunSuper.
These results raised the obvious question of whether members’ premium payments were being used to pay genuine claims.
The suitability of a lump sum to meet members’ insurance needs
Lump sum TPD payments receive favourable taxation treatment compared with monthly disability income payments. However, the lump sums are generally being applied to take the place of income no longer able to be earned by the disabled member. This raises questions as to the adequacy of the lump sums and the need for customised advice for each claimant on how to effectively deal with the lump sum.
The opportunity for anti-selection in policy terms
There have been examples funds offering opportunities for anti-selection such as:
- Allowing past recipients of terminal illness and/or TPD benefits to re-enter funds and be provided with further unrestricted TPD cover.
- Allowing new fund members to take out significant amounts of additional cover with little or no requirement for the applicant to be “actively at work”.
- Continuing the provision of standard TPD cover for members who have been potentially unemployed for a significant period (as evidenced by cessation of contributions).
The role of rehabilitation
Only recently have insurers in the group market sought to consider rehabilitation across a broad spectrum of disability claims. It had previously been used quite selectively with its use being limited by the late notification of claims.
With an upgrading of processes to encourage early notification of claims, its wider use is being trialled by most insurers. The main initial focus has been on disability income claims rather than TPD claims.
Late notification of claims
With limited awareness among members of the death and disability cover provided by superannuation funds, many claims are not notified to the fund and its insurance comapny until many years after the claim event. This has presented significant issues in sourcing appropriate medical and other evidence to allow the assessment of the claim and the eligibility of the member for the cover at the time of the claim event.
Increasing lawyer involvement in claims
Recent ASIC research has shown an average decline rate of less than 20% of group TPD claims. This indicates that more than 80% of the claims are paid, many by following standard fund processes without any legal intervention. However, in an increasing number of cases, lawyers are becoming involved, even in cases where there is no dispute between the fund and the claimant. In these cases, the involvement of the lawyer often results in:
- No different claim outcome than if there had been no lawyer.
- A significant legal fee, which reduces the funds available to the claimant.
- A slowing down of the claims process due the extra party being involved.
- A better understanding of the claims process by the claimant, if the lawyer does their job well.
Bad publicity of high decline rates
2016 was a year of significant adverse media attention on death, disability and trauma insurance coverage.
This media attention has:
- Led some fund members to question the value of their insurance cover.
- Influenced the outcome of some industry fund insurance tenders.
- Highlighted the wide range of methods used by insurers in determining the proportion of claims being declined. Following the ASIC research referred to above, one insurer was reported to be declining 37% of its disability claims. On further investigation, it was found that the insurer was using a much broader definition of “disability claim” than any other insurer in the industry. Many of its declined claims would not have been considered to be claims by other insurers. This example highlights the need for a standardised approach to recording claims as well as a standard method of counting the time from when the claimant initiates the claim process to when the claim is paid or declined.
Affordability of cover
Significant increases in premium rates since 2013 have put a greater focus on:
- The degree to which superannuation savings are being reduced by insurance premiums.
- A reasonable balance needs to be maintained between initiating cover (and keeping cover in place) for different groups of members and the impact that the premiums have on superannuation savings.
- The equity of the premiums being charged to different groups of members.
- There is now a greater focus on identifying cross subsidies between different member groups and considering whether this is appropriate.
THE INDUSTRY RESPONSE
Many issues have been raised by the media concerning the management of TPD benefits provided for fund members. Not surprisingly there has been a multi-faceted response from the industry. Important elements of this response include the following.
Updating the TPD definitions with aim of making them more closely aligned to the best interests of all members
Important changes include:
- Including requirements for reasonable retraining and rehabilitation in definitions.
- Replacing the word “unlikely” by the more definite “unable” or “incapable”.
- Defining more clearly the date at which the claimant’s condition will be assessed and whether only completed retraining and rehabilitation will be taken into account.
Strengthening the risk control provisions in policies
The increases in premiums since 2013 and the analysis of the causes of the increased claims have led to:
- Restrictions on the provision of cover for past TPD and terminal illness claimants.
- More careful consideration of the “actively at work” status of members seeking to initiate/ increase their cover.
- Consideration of how, and defining the circumstances in which, the standard TPD definition can be applied to member’s TPD cover and those cases in which a more stringent definition should apply or the cover should be switched off.
More detailed analysis of the emerging claims experience
Many funds have negotiated an improvement in their standard SP250 reporting from insurers to include an analysis of the main drivers of their emerging claims experience and how this is expected to impact on premiums from the next renewal date.
Modernising claims management processes with emphasis on
- Early notification of claims and early contact between claim staff and claimants.
- Triaging each claim to identify those where there is a role for rehabilitation and/or retraining and to customise the management process taking account of the details of each claim.
- Improving the use of technology and its co-ordination with the phone and paper based processes.
- Appropriate consideration of the needs and roles of the claimant, the Trustee, the administrator and the insurer.
A move to paying TPD claims by instalments and consideration of greater co-ordination of TPD and disability income benefits
This is a significant move which, to date, has only been adopted by a small number of funds but many others are “watching this space”. It involves a new assessment of the TPD status of the claimant, and in some cases their compliance with medical, retraining and rehabilitation requirements, before each claim instalment is paid.
Its effective application also requires rules to determine the cases where one single assessment will be made including:
- The claimants who are clearly highly disabled without any prospect of improving to an extent where the TPD status would be questionable.
- Small sum insured cases where multiple assessments and the payment of the claim by instalments would be financially inefficient.
Improving member communication facilities to better:
- Inform members of the insured benefits that they have and how these benefits operate.
- Allow members to understand that most genuine claims will be paid without lawyer involvement.
- Help members to understand how their claim will be managed and how it is progressing.
A greater focus on the cost of insured benefits to different groups of members
There has been a real focus to:
- Limit premium deductions to a level that does not unduly reduce superannuation.
- This has included restricting the level of cover to certain groups of members and “turning off” the cover of other groups.
- Identify cross subsidies in premiums and develop plans to remove or reduce them.
- Move disability income cover outside of superannuation by some major employers, thus reducing the premium pressure on superannuation savings.
Disability cover in superannuation is an evolving provision. The disruptions in the group market since 2013 have led to a lot greater degree of analysis of the drivers of the claims experience with the main responses being the tightening of TPD definitions, the increasing risk controls, the move to pay TPD by instalments and the greater use of rehabilitation and retraining aligned with early notification strategies, in some cases co-ordinated with employers and workers’ compensation providers.
It is expected that the payment of TPD by instalments will expand and in time will lead a combination of TPD and disability income provisions in some funds.
The actual insurance provisions and processes will be more tailored to the circumstances of particular membership groups within funds.
Already, we are seeing large funds establish significant partnerships with their insurers, recognising that it is the interests of both to build a sustainable insurance business which provides good value for all members.
We expect a transitional period for the superannuation industry before benefits are better aligned to member needs and insurance becomes more profitable.
Rice Warner has an extensive suite of Group Insurance research including the ‘Quarterly Group Risk Bulletin’ and the ‘Affordability Study: Group Insurance in Superannuation’. For more information about our research reports, email firstname.lastname@example.org