Changes will impose additional costs and complexity

MT: The Financial Planning Association (FPA), I notice in the submission filed not too many days ago, made the point that low balance superannuation funds are often maintained by people quite deliberately who want to access insurance. They quoted it as being a legitimate piece of advice. Adam, starting with you on this one, in what you have seen, do you acknowledge that is something that they need to take into account? 

 

AG: Absolutely. We don’t provide formal financial advice, but obviously we have a number of high net worth individuals that maintain duplicate accounts purely for the insurance benefits that are provided, whether you split an income protection benefit through one fund, and a death and TPD through another. Absolutely, it is a common occurrence.

 

It is probably in the minority. I will be honest with you, but there is no doubt that there is a number of people that maintain separate accounts purely for different insurance, and I am sure you would see the same thing. 

 

FC: The risk-only accounts as well. They don’t really have an account balance, as such, because the account balance equals the premium. So, it wasn’t clear whether they are, sort of, in or out of the scope.

 

JB: The problem with it all is you have got no idea who is who. You don’t know who is keeping their account balance for a specific reason, and who isn’t? And, I agree, the numbers who are keeping those inactive accounts for insurance purposes is going to be small, but potentially catastrophic if they lose it and they thought that they had it. There are some things you can infer from if they are going into those inactive accounts and still making investment decisions. You know, does that mean it is really active?  

 

SP: Does that mean it is active, yes? 

 

JB: Yes. How do you define activity?

 

SP: How do you define active?

 

JB: The biggest problem is you don’t know who is aware they have got insurance in one set, and who isn’t aware.

 

SP: How long does active stay for? Does it stay for ten years? Five years? There is also an argument, if you are 40 and you have only got $6,000 in your super account, and there are people in that boat, are you better off with the money just staying there and keeping your cover, because the $6,000 isn’t going to do you any good in retirement. It is not going to build into anything substantial, so are you better off with the money just being there and having that risk cover in place? It is a -

 

BB: It will vary from person to person, but it will be some people for whom the cover will be much more valuable. If you have got a $600,000 mortgage and you have got $600,000 cover, that is worth a lot more than $6,000 in your account. 

 

The existence of these accounts, kind of, illustrates one thing and that is that insurance through super is highly efficient. So, it is cheaper, and why is it cheaper? Because the insurers don’t have to underwrite everyone. If someone is at work on day one, then they are probably going to be a good line. They don’t have to collect data on everyone. They collect bulk data and they process the claims in bulk, so the whole system works well from that point of view. If you replaced the whole system by individual insurance policies, it will cost a lot more for everyone to do it. In fact, it probably wouldn’t happen anyway.

 

SP: I think the insurance for those under 25, there was stats covering where it was from, but yes it is usually an annual premium between two and three hundred dollars, and if you compare it to other insurances like comprehensive car insurance or home and contents insurance, or even private health insurance, you are looking at between $1,500 and $2,000 depending on the design, so it is a cost effective way to apply for insurance. As we have said, it is the baseline cover and it does provide that safety net.

 

JB: We have done a lot of work before the budget came out, with funds, looking at re-designing the insurance designs, and they are all bringing it down below 25, but no one was switching it off before the budget changes came out. It was just being pushed down to an appropriate level, so I felt it was already being sensibly dealt with, without the need to completely cut it off.

 

AC: If you look at the trustee thing, it is the trustee’s responsibility to act in the best interests. I mean, trustees will understand the different cohorts of members, I think. Some trustees will say there is more need for some form of disability cover, or TPD. You know from a claims experience where the need is, so I agree with you. They are already addressing that by these ongoing reviews.

 

SP: I think the Productivity Commission report had something in it about the requirement for the trustee to assess the level of erosion as a result of premiums and, realistically, the only way you can probably satisfactorily address it is to say, “Well, if I just have the minimum that the law requires then I don’t actually have to – I am not taking any risk at all from an account erosion perspective”. I am not sure that is a good outcome. 

 

PW: I look at that question and I think, under the SIS Act, of course, the trustees have got duties to make sure it is not inappropriately eroding, and I think that some of that goes to benefit design, because whether a product is going to be inappropriate is going to be a question about value for money, and you have got some insurance products out there which are.

 

There are some super funds around who are changing their benefit design substantially. Introducing things like retraining clauses, making those more-harsh definitions, and those sorts of things. I think that that is something that is included also in the Super Code, and it is something that I think needs to be a greater focus, is the quality of the product.

 

SP: It is potentially an unintended consequence of the changes, in that the changes will result in a premium increase, and to keep premiums down the funds – the insurers will look at ways of keeping the premiums down, which makes the definitions harsher. So, it is a potential – it is an unintended consequence potentially of those changes.

 

JB: I think there is still a lot of uncertainty around what the premium impacts will be. I fully respect you have got one estimate of that, but talking to some of the other individual insurers – I mean, they are all trying to work through it, and the data is not nice and it is complicated to do, but I think it will go up and then it will, kind of, settle back down a little bit, because when you don’t have all the information you need, your natural response in pricing actuary is to build in some caution. I think it will come down and it will settle, and I don’t think it will be as high as 26 per cent. People might do 10 per cent, or 15 per cent, but I agree it is going to be ultimately higher, so then we will see another wave of changes because you have still go that 1 per cent affordability cap, which wasn’t legislated, which wasn’t in the budget. It could have been. It wasn’t. But, the funds will still have to explain why they don’t meet it, and they will also have to have a good reason and a good rationale as to why they don’t meet it. 

 

BB: Of course, premiums can go up by 50 per cent in a year for other reasons, which has happened in the last few years, so you could quite easily find that premiums aren’t acceptable now, but next year they are not going to move. I suspect the answer to that; how much will it cost, will depend very much on the fund. I think there are definitely funds for whom it will be 26 per cent or more, so funds with higher numbers of inactive accounts and younger members, and there are some obvious funds there. There will be some funds, particularly corporate funds and maybe funds like UniSuper where it won’t have as big an impact.

 

JB: I agree. It is going to vary dramatically by fund, and it is why it creates a lot of uncertainty right now for funds, because they don’t know what their premium change is going to look like. 

 

AC: Especially, with the timeframes too. If you go back to the timeframes, if you are going to try and price all of this business from July. That is going to create pressure. There is going to be price knock-ons, and it will lead to some form of more conservatism, because you are looking to price really quickly. You haven’t got the time to do the analysis. Ultimately, if we are going to do this, this government needs to really address how can the industry do this, because we can’t do it as quickly as they say.

 

FC: Does the industry have capacity? 

 

AC: Well, exactly. Capacity to -

 

JB: And, the administration alone -

 

FC: If you work backwards as Anthony has mentioned, it may need to be writing out to the membership and then you work backwards again in terms of SENs and board meetings and so forth, and then the analysis towards the beginning of 2019, and then the insurer needs to do the analysis around Christmas time. We are already in June, so it is only a few months to be looking at the data across all super funds. Corporate super, master trust, multi-employer, fiduciary. So, it is quite a lot of work.

 

AG: You have effectively got 149 funds that are going to re-price over the next 12 months. 

 

JB: I know. It is absolutely intense.

 

FC: All to do the analysis.

 

AG: But, I think on the value question, that is a difficult one. I will quote some highly intelligent CEO that said to me, “You don’t crash your car every year so you get value out of your car insurance.” This is always the challenge with insurance as a whole. It is great to have it when you need it, but if you don’t ever need it then can you apply a value to it?

 

I think as an industry, superannuation was created because people couldn’t save for themselves, and I think the default cover system is there because people won’t insure themselves if we don’t give them something. So, to remove that for a significant number of members is going to present a real challenge, I think, not only for the industry as a whole but for Australia and the community as a whole, because we already have an underinsurance problem, and that is only going to worsen if we remove cover for these significant numbers of members