MySuper and insurance - a challenge or an opportunity for insurers?

The advent of MySuper represents a game-changer for group insurers but, as Damon Taylor reports, many are viewing the challenge as an opportunity.

As Australia’s super industry marches steadily towards July 2013, it seems unlikely that fund executives will be contemplating long Christmas breaks. 

Now just over six months away, the agreed reality is that MySuper will be a game changer for superannuation – and according to Damian Mu, general manager of life insurance for AIA Australia, that reality is no less relevant for insurers.

“Yes, MySuper is a game changer and it will undoubtedly bring some constraints to superannuation funds,” he said.

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“But what is far more important is the fact that when the (Cooper) review was done, it validated the importance and the need for insurance inside super.

“Within these reforms, there is still the opportunity for trustees to tailor a significant portion of the insurance they’re providing members,” Mu added.

“And so we see it as one of the key areas in which super funds will be able to differentiate.”

Similarly, Frank Crapis, head of industry funds for CommInsure, said that while funds had to date been focused on the implementation aspects of MySuper, there was a growing emphasis on the insurance opportunity that it could also represent.

“So up until now, there’s been a lot of talk about what it is and how it should be implemented,” he said.

“But now that we’re getting closer to the day that it’s actually going live, the question is ‘what is MySuper and how will it be an opportunity for the fund with respect to insurance?’

“And the way we interpret that opportunity is this; MySuper will make superannuation and the insurance provided with it a commoditised and homogeneous product,” Crapis outlined.

“So the way funds will be able to compete going forward will be based on service, but also on the provision of income protection insurance attached to their MySuper product.

“At the moment, income protection isn’t legislated as being a requirement, a default component, so that’s where we see a clear opportunity to differentiate yourself from other funds and other competitors in the market.”

However, having recently conducted a survey where 55 per cent of super fund respondents indicated their intention to include income protection insurance as a part of their MySuper product, Mu said there already had been a marked improvement in insurance offerings over the last 10 to 15 years.

“Super funds have really started to assess where they’re setting their levels of cover and what types of benefits they’re providing,” he said.

“So what I think MySuper will do is give everybody an opportunity to reassess the insurance cover they’re offering with the positive reinforcement that the legislation provides.

“They’ll be able to assess where their current levels are, what types of benefits they provide and how they stack up,” Mu continued.

“But I think the most important part to come with it is not necessarily a lifting of cover but a framework whereby insurance coverage is regularly reviewed.

“To be assessing insurance and how it’s suited to their membership on a regular basis will definitely add more rigour; funds have been doing it, but this probably gives them a more genuine framework for insurance.”

But while MySuper may be being viewed as an opportunity for both insurers and their super fund clients, not all Stronger Super reforms are viewed as positively. 

As an initiative focused on reducing the number of inactive superannuation accounts, and subsequently the fee burden on members, auto-consolidation is applauded.

However, for Marc Lieberman, chief executive officer at MetLife Australia, the prospect that automatic consolidation could lead to members losing valuable insurance coverage held within those consolidated accounts remains a very serious concern.

“There’s already been significant debate around auto-consolidation but I remain very concerned about how its going to be executed,” he said.

“I’m not aware that specific decisions or processes have been decided on yet, but I remain concerned because it only takes one example of someone assuming they had cover in one of several different super funds and finding out otherwise for this to all come unstuck.

“If something happens to that individual and that account has been auto-consolidated, they may discover that they simply don’t have the cover they thought they had,” Lieberman added.

“Or even worse, their surviving family doesn’t have the coverage they thought they had. 

“That kind of scenario is all it would take for this to all go awry.”

Outlining similar concerns, Crapis pointed to the Federal Government’s recently released mini-Budget as an added complication.

“With auto-consolidation, what we’ve been told is that the first phase is at the $1000 balance level,” he said.

“So if a member of a fund has an account balance of less than $1,000 and 2 years without contributions, that account will be deemed inactive and it will therefore be rolled over into an active account.

“But in the mini-Budget that was released at the end of October, the Government has now indicated that account balances of less than $2000, where no contribution has been received in the last 12 months, will be transferred through to the ATO (Australian Taxation Office),” Crapis explained.

“Now that’s a big change, so the question is how that will impact the auto-consolidation process.

“What’s the point in moving to $1000 if the rule is that any member under $2,000 in the last 12 months is going to go to the ATO and lose insurance altogether?”

For Paul Cahill, chief executive officer of Club Plus Superannuation, the question is a valid one – and just one more reason for the super industry’s continual desire for legislative clarity.

“If auto-consolidation was an issue before, then this newly instituted ‘auto-confiscation’ program that Wayne Swan’s introduced makes it even more dangerous,” he said.

“Because it’s only a 12-month period and in our industry, where we’ve got uni students who work in the club over Christmas, go back to uni and then come back 12 months later, what’s the situation then?

“They may find their money and their benefits gone when they come back to it.”

Yet in the absence of legislative clarity around auto-consolidation and insight into what the Government might to do ensure a loss of insurance cover does not take place, Lieberman said that it fell to super funds and insurers to make appropriate preparations.

“This is one of the most important aspects of the whole reconfiguring of MySuper and the Stronger Super legislation,” he said.

“And so it really has to be thought through in terms of how auto-consolidation works, what type of communications need to go out to those members before it happens, and how you’re making these decisions on the behalf of those members.

“The key here is ensuring that they understand it, that they’re aware of the outcome of those decisions and that you’ve done everything possible to make it as harmless as possible to them.”

Encouragingly, this joint recognition of the risk posed by auto-consolidation is as much proof of the growing relationship between super funds and insurers as it is of a growing concern. 

Where the insurance conversation previously focused on the price paid per unit cover, it seems clear that the service element is now front of mind and for Mu, such a shift is entirely appropriate.

“Clearly, it’s still important that members are paying an appropriate price for cover, because the reality of having insurance inside superannuation is that premiums inevitably detract from the overall retirement benefit,” he said.

“That said, it has long since moved on from being just a price point and is undoubtedly about the end-to-end offering now.

“For example, it’s not just setting the default level of cover at the right level but looking at options such as life event triggers,” Mu continued.

“So at the birth of a member’s child, when their cover becomes so much more relevant, a fund can look to making it easy for them to take additional cover without underwriting.

“But it all starts with having an insurance partner that can work with their fund to develop the right product offering and ensure that the right benefits are available.”

And while the service element of insurance is most noticeable during time of claim, Lieberman said that for good insurers, it should really go beyond that.

“It should be more than when they make a claim, but very often that’s the first time a member will have an interaction directly with an insurer,” he said.

“We’ve been preaching value over price for the last several years here at MetLife because we do believe insurance is more than a commodity, and in order to be able to provide the value-add that MetLife does, we’ve got to have fair pricing in the market.

“And that doesn’t mean the cheapest price each and every time,” Lieberman added.

“What an insurance company has to do is really look at their value proposition to say what they’re providing to a customer beyond the basic risk coverage.

“So it’s things like technology, how the member accesses information about their coverage, what type of communications are out there, how the super fund interacts with the insurance company; it’s about the flexibility and participation and value-add that the insurance company can provide.”

Dividing the service and relationship side of insurance into two parts, Andrew Boldeman, chief executive officer of Group Life for TAL, said that from a member’s perspective, the most important aspect was clearly time of claim.

“Members want to have confidence in their insurance; they don’t want to have to use it but if they do, they want to be confident that their insurer will be there and doing the right thing by them,” he said.

“They want them to pay up and do so in a way that actually doesn’t add more stress to them.

“From the perspective of the group life insurer, it’s really about working with our partner funds to make it as easy as possible for customers to do what they need to,” Boldeman continued.

“It has to be easy for them to claim, execute insurance changes, understand what they need and give them confidence.

“So it’s the combination of those things and working with the fund to deliver on their value proposition – that’s the key service element that many of our funds are looking for from us.”

Offering perhaps the most important perspective, Cahill stressed the importance of relationships that went well beyond a 3-year contract.

“There’s really two buckets on this,” he said.

“When it comes to insurance, you get your black and white claims undoubtedly; but when you get the colour grey on it, that’s when your relationship with your insurer comes to the fore.

“And over my 21 years in this industry, I’ve seen good relationship where they say, ‘Paul, we really shouldn’t pay this but we’re going to because it’s neither here nor there but for the sake of relationship with the fund, we’ll do it,’” Cahill explained.

“But then you also get other insurers who take the position of ‘it’s black, it’s white’, and then what can we say?

“What I do know, however, is that the good insurers in this market are the ones that can build relationships, the ones that know that a good three-year relationship might buy them 10.”

Of course, if there is one area of insurance provision in which the relationship between insurer and super fund becomes vitally important, it is in tackling Australia’s acknowledged underinsurance gap. 

Yet with estimates ranging anywhere from $1 trillion to $3 trillion and with symptoms far more obvious than solutions, Mu said that the first step was understanding that there was no ‘one size fits all’ approach.

“If we have a look at it, superannuation funds have done an amazing job in reaching millions of Australians to afford them some level of cover – with the opportunity to opt up to higher cover as well,” he said.

“Yet the reality is that finding default insurance arrangements which meet every single member’s needs simply isn’t possible because everyone’s needs are different.

“So from the super fund perspective, it’s about being able to offer a range of benefits and setting an appropriate default that’s not over-insuring people or being too cost-prohibitive with respect to their superannuation account,” Mu continued.

“And then allowing members the opportunity to increase their insurance through their own choice.

“But I think that’s where insurers and funds need to work together to look at how we can engage members through education, direct marketing activity, needs analysis, calculators, ease of application and so on.”

Echoing many of Mu’s comments, Lieberman said that the industry’s primary goal had to be maintaining a dialogue with consumers.

“We have to start a dialogue around the issue that involves consumers,” he said. “It’s very easy for all of us in the industry to get in a room and discuss and debate the under-insurance problem and agree that it’s there.

“Yet the problem is that that’s our job; we think about insurance 24 hours a day, however the average consumer simply doesn’t do that,” Lieberman continued.

“They don’t think about it unless they see an ad on television or something happens to them or someone they know [in situations] where insurance comes into play.

“And so we have to find a way to break through that – we have to get them to realise that it’s worth the investment of their time and energy to try and understand.”

For Boldeman, the unfortunate reality is that closing the under-insurance gap may well rely on coverage provided outside of superannuation, on cover paid for by members out of post-tax dollars.

“Like it or not, the need itself is independent of how its actually paid for, whether its pre-tax or post-tax, inside super or outside,” he said.

“At the end of the day, the need’s driven by what someone would actually need to get by in the case they were disabled.

“And one of the challenges for super funds is that they’ve also got to balance that need with a sufficient accumulation of savings, particularly with MySuper members who may not be as heavily engaged,” Boldeman continued.

“There are going to be maximums to which they can actually increase default cover without adversely impacting the expected retirement benefit for their members – and so it’s always going to be a balancing act.”

But while there are any number of takes on under-insurance, Mu’s strong belief is that the solution lies in continual improvement.

“To my mind, the solution is making sure funds continue to review their default cover and the types of benefits they offer, trying to keep that as relevant as possible based on their membership,” he said.

“It’s then about building in easier mechanisms and tools which allow people to get more aware, and then make more active decisions to take up more cover.

“I’m not saying that will go all the way to resolving the under-insurance issue,” Mu continued. “In fact, I’m not sure that it’s ever about closing that under-insurance gap to zero, because I don’t think that’s possible.

“What it is, however, is continuing on this journey; making people more aware of insurance and giving them the option of taking up more cover as and when they need it.”