Rice Warner’s Affordability Study: How affordable is group insurance in superannuation?

There has been much discussion and debate in recent months about the affordability of insurance within superannuation and even whether it is relevant for insurance to be held within a MySuper superannuation fund. The main purpose of superannuation is to ensure that a member and their dependants are provided with income when the member is no longer able to work. For most members this occurs when they retire from the workforce, usually in their 60’s. As every dollar spent on insurance is one less dollar that can be invested in retirement, this is an important question to ask. Insurance premium rate increases being experienced by many (most) funds further highlight this issue.

For some members, the inability to work occurs due to illness, injury or death, all of which can occur at any time. If this happens before a member has accumulated a reasonable superannuation benefit, it is unlikely that the member’s superannuation balance(s) will make a meaningful contribution to meeting the family’s income needs. For this reason, Rice Warner supports the continuation of default death and disability insurance within superannuation product design.

MySuper products are required to provide default death and total and permanent disablement (TPD) cover, subject to certain conditions and may also provide default income protection cover. Default insurance cover provided by superannuation funds has been a key factor in reducing Australia’s underinsurance problem, although it is still far from sufficient to meet full insurance needs, as demonstrated by Rice Warner’s Underinsurance in Australia Report 2015.

Trustees are well-placed to obtain cover for fund members on good terms and at relatively low cost without the need for members to complete forms or undergo medical assessment. However, a balance needs to be made between providing a sufficient level of insured benefit and the impact insurance premiums will have on retirement benefits. Section 52(7) of the Superannuation Industry Supervision (SIS) Act in particular places a covenant on Trustees requiring that insurance can only be offered or acquired if the cost does not inappropriately erode the retirement income of beneficiaries. This can be complex to determine. However, Rice Warner has carried out research (Rice Warner’s Affordability Study: Group Insurance in Superannuation) to determine how affordable default death, total and permanent disability (TPD) and income protection (IP) insurance cover is by considering amalgamated industry experience across mainly not-for-profit funds.

The study estimates the impact of insurance premiums on members’ account balances at retirement under a range of different scenarios based on industry level data, highlighting areas of concern and actions for Trustees to consider. These are vital to address as insurance within superannuation is a valuable benefit. It is important to acknowledge that affordability issues vary considerably from fund to fund and the potential solution will differ for each fund.

Some of the highlights from the Affordability Study are set out in the infographic above.