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Where is insurance in super at?
To say that insurance held inside superannuation funds has had a few challenging years is a bit of an understatement.
After the closure of inactive accounts, switching off insurance in accounts under $6,000, excluding insurance for members under 25 and for new members until their accounts reach $6,000, and now the stapling and performance testing of super funds, the question is how is insurance in super holding up?
The answer appears to be it is still surviving and continuing to offer relevant products that offer value for money, at least that is what the latest Australian Prudential Regulation Authority (APRA) data shows.
Up to now
APRA life insurance statistics published for the 2020/21 year, highlight that the success rates for total and permanent disability (TPD), income protection, and death cover claims in group insurance in super (89%, 95% and 98% respectively) are higher than any of the other life insurance vehicles, namely individual advised and direct sale, and other group cover.
In addition, the claims paid ratios are very high, indicative of well targeted products that are value for money. At 97% and 72% respectively, TPD and death cover claims paid ratios compare very favourably with other insurance products. For example general insurance for compulsory third party (CTP), public and product liability, and home and contents policies (from APRA general insurance statistics published in July 2021).
The claims paid ratio for income protection insurance in super is even more generous, currently sitting at 111%. However, APRA has rightly flagged that this is unsustainable in the longer term and has required that super funds and insurers take steps to ensure that insurance offerings are “sustainably designed and priced”.
Individual income protection products have had even more direct measures imposed by APRA to maintain their viability, particularly regarding long term income protection.
In a broader sense, insurance in super has experienced market volatility in the last decade, mainly a consequence of the push for market share that occurred after the introduction of choice of fund legislation in 2005.
That together with increased consumer awareness and external pressure from regulators, various enquiries and media scrutiny, led to significant insurance losses in the 2010’s. This in turn led to significant increases in premiums, narrower terms and conditions and problematic claims handling, the latter of which was highlighted in the Royal Commission into banking and financial services.
Whilst these issues have stabilised somewhat in the last few years, some recent legislative changes pose new pressure points.
PYS and PMIF
It has been nearly two years since the introduction of the Protecting Your Super (PYS) and Putting Members Interests First (PMIF) legislation. Designed to prevent the unnecessary erosion of retirement accounts by poorly targeted insurance, the legislation has led to a significant drop in the number of superannuation accounts with insurance.
Some of this is welcome. The consolidation of duplicate accounts with income protection insurance that cannot be claimed twice and the scrapping of death cover for young workers under 25 has removed poorly targeted insurance cover.
However, many Australians have lost the only life insurance and disability insurance cover they had, as existing accounts with under $6,000 had their cover switched off.
Under the PMIF legislation, members were to be notified of the option to continue their insurance cover by 1 December, 2019. Approximately 16% did so but we have seen many examples of fund members who either did not receive the written notices or did not fully understand or pay attention in the lead up or subsequent to Christmas 2019.
A case in point is Bernadette (not her real name) who set up a super account in 2009 as a vehicle for long term death and TPD cover. She paid initial contributions into the account sufficient to maintain the insurance cover and assumed it would continue in the long-term.
However, the cover lapsed in July 2019 because the account was inactive for 16 months. She only became aware of this after she was diagnosed with stage four cancer in 2020 and unsuccessfully claimed a terminal illness benefit. She is now dependent on Centrelink benefits.
It is also noteworthy that the Australian Financial Complaints Authority’s (AFCA’s) 2020/21 Annual Review reported receipts of complaints about the cancellation of insurance consequent on PYS and PMIF.
How they will unravel administrative errors or compensate successful complainants remains to be seen.
Such scenarios were entirely predictable, but the Federal Government included the small account transition measures, despite the warnings of some of us in the consumer movement.
Stapling
The other major issue is the potential impact of stapling. Introduced in July 2021, stapling will lead to super fund membership becoming more diverse and less occupationally aligned as members are stapled to their first (or existing) super fund as they move from job to job.
The median age and account balance of members will likely rise but the pool may include a wider range of casual workers, those with broken work patterns and those in high-risk occupations.
This could lead to cross subsidisation, more basic levels of default cover and the greater use of blunt general underwriting tools such as occupational, pre-existing condition and mental health exclusions.
The Financial Services Council (FSC) has announced it will introduce a standard for its members to prohibit the use of exclusions and narrow disability definitions for high-risk occupations, including in default group insurance in super. This is welcome.
However, a more broad ranging introduction of universal terms and conditions, as recommended by the Hayne Royal Commission, was side-stepped by the Federal Government. The recommendation was for
Treasury to consult with industry with a view to legislating key definitions, terms and conditions for default MySuper group life policies.
Treasury conducted a limited consultation in May 2019 but disappointingly, no legislation followed, despite the Government’s assertion that it had implemented the recommendation.
Other measures
Other measures which could impact the availability and affordability of insurance in super include:
- Superannuation members shifting from funds that fail the Your Future, Your Super performance test and lose existing insurance – although in the first iteration, only a modest 7% have moved funds;
- The COVID-19 early release of two tranches of super up to $10,000 each, which has reportedly drained upwards of 500,000 accounts. Many of these accounts will have included insurance – although some will have insurance reinstated (perhaps with some underwriting restrictions) as accounts are replenished; and
- COVID-19 support measures such as JobSeeker and JobKeeper payments and working from home which have kept many workers in employment and reduced the number and size of disability claims. However, the potential impact of long-COVID claims is yet to be felt.
Summary
Insurance in super has come through a tough period in reasonable shape. However, the full impact of the changes from the last few years and the industry response is still a close watch for consumers.
The protection of the basic tenet of insurance in super to provide affordable insurance for the millions of Australians who otherwise have no insurance cover is vital to support the retirement incomes of those whose working lives may be cut short from disability or death and to reduce dependence on the welfare system.
John Berrill is a director at Berrill and Watson Lawyers.
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Leading industry experts contribute to the Money Management & Super Review website and magazine, providing insight into a wide range of specialised topics within the financial services industry.
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