Insurance across all distribution channels decreased by 17% and 19% for death and total permanent disability (TPD) cover respectively since June 2018, and this significant reduction was driven mostly by the drop in group insurance inside superannuation, according to Rice Warner.
The research house’s ‘Underinsurance in Australia 2020’ report said the drop in group insurance inside super was 27% for death and 29% for TPD cover.
The study found that underinsurance highlighted the need to heighten targeted engagement and awareness of the underinsurance issue at an individual level as well as targeted marketing and improving the ease of accessing insurance via all distribution channels was also important.
Also, the life insurance industry had seen numerous changes over the last 18 months, from the Insurance in Super Voluntary Code of Practice, Life Insurance Framework reforms, Protecting Your Super (PYS)/ Putting Members’ Interests First (PMIF) legislation and the impacts of the COVID-19 pandemic and all these changes had an impact on the level of underinsurance.
In particular, the implementation of PYS/ PMIF legislation played a key role in attempting to remove duplicate accounts and unnecessary insurance through the ceasing of default insurance cover for young members, inactive accounts and low balance accounts, Rice Warner said.
“There had been a significant increase in the amount of insurance cover provided to the community though superannuation funds over the last 10 years and the underinsurance gap had been significantly reducing as a result,” it said.
“However, in light of the current insurance landscape, and the greater clarity that PYS and PMIF has introduced, our research shows that the underinsurance gap has widened since our last research in 2017,” the firm said in a report.
Rice Warner described underinsurance a direct cost for the Government in terms of additional social security and other related payments, particularly for Australians on modest incomes.
“We have estimated the current total cost to the Government in social security payments of death and TPD underinsurance across Australia to be well over $600 million per annum. This is based on the income replacement level of death and TPD needs,” it said.
As far as superannuation was concerned, the report found: “The default cover of typical superannuation funds does not meet the full insurance needs of many families as the median cover is significantly less than the income replacement level required for death cover and TPD cover.
“The median default cover of superannuation funds meets approximately 65% to 70% of basic level death cover needs for average households, but a much lower proportion for families with children.”
Source: Rice Warner