Government should tread cautiously on insurance in super

Mike Taylor writes that the Government’s proposals to make it easier for people to opt-out of insurance within superannuation comes with risks which cannot be ignored.

The Federal Government has moved to update the rules around superannuation by late last month releasing the Treasury Legislation Amendment (Improving Accountability and Member Outcomes in Superannuation) Bill 2017.

The industry’s initial response to the legislation suggests it is being broadly welcomed, but there is a key element of the draft bill which carries with it the significant danger of worsening Australia’s already serious under-insurance problem.

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Almost as an afterthought and at the tail end of her statement outlining the new legislation, the Minister for Revenue and Financial Services, Kelly O’Dwyer stated: “The Turnbull Government has also tasked [the Australian Prudential Regulation Authority] APRA with making it easier for consumers to opt out of automatic life and disability insurance policies provided through superannuation”. 

The minister did not say more on the issue, and the legislative summary drafted by the Treasury is also short on detail, but the Government’s announcement about making it easier for consumers to opt-out of automatic life and disability insurance comes amid not long after a lengthy debate within the industry which has canvassed turning the traditional “opt-out” approach to insurance within superannuation into “opt-in”.

What O’Dwyer and, indeed, most senior officials within Treasury know is that superannuation has been the key delivery mechanism via which Australia has managed to reduce the scale of the underinsurance gap. What they would also know is that making insurance within superannuation an “opt-in” arrangement would virtually reverse this situation.

Making it easier for consumers to opt-out of automatic life and disability insurance policies provided through superannuation is nowhere nearly as dangerous as adopting an “opt-in” approach but it will nonetheless have a serious impact.

The reason for the Government’s decision to push for easier “opt-out” arrangements is the strong evidence that the superannuation balances of lower income earners such as apprentices and some women can be seriously undermined by the cost of the premiums necessary to pay for the insurance.

The evidence of this was laid bare during the recent Parliamentary Joint Committee inquiry into the Life Insurance Industry which heard evidence of the superannuation account balances of low income workers being drained by the cost of insurance premiums.

However as much as the evidence around premiums draining account balances was disturbing, the Parliamentary Committee was also told about the positives of group insurance with major insurer, AIA Australia using its submission to suggest that a move away from the “opt-out” regime could result in more than 13 million fund members being left without protection and seeing a drop from 90 per cent of insured individuals to a low of 18 per cent.

The Association of Superannuation Funds of Australia (ASFA) made a strong appeal to the Parliamentary Committee for substantial maintenance of the status quo with respect to insurance within superannuation.

Its submission to the committee said insurance in superannuation alleviated systemic underinsurance and “the potentially devastating economic implications for individuals and their families who face disability or premature death, whilst also reducing the level of social security benefits payable due to a lack of coverage”.

“It is worth considering that despite the wide coverage provided through superannuation funds, the level of underinsurance remains high,” ASFA said. “The median level of life cover meets about 61 per cent of the basic needs for average households – and for families with children it is a much lower 37 per cent of needs.”

It said group insurance enabled the provision of insurance to people who might otherwise not be able to afford it, saying it was based on a pooling of lives that, in the absence of individual medical underwriting, includes a selection of both good and bad risks.

“This means that members who may have pre-existing medical conditions, work casually or part-time, or work in high risk occupations, are generally able to access insurance cover,” it said. “Access is through group arrangements at an affordable price without the imposition of restrictions, exclusions or premium loadings – or even denial of cover – if they were to be underwritten for individual cover.”

Life and disability insurance cover held in superannuation accounts typically has lower premiums than comparable policies held outside superannuation. The premium for a given level of cover is lower across age categories between 30 to 60 years, for both genders, inside superannuation. The difference in premiums ranges from approximately 25 per cent to 55 per cent less for females increasing with age. For males this benefit ranged from approximately 35 per cent to over 60 per cent also increasing with age.

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I wonder which practicing financial advisers Ms O’Dwyer or her minions discussed this issue? Was there any evidence heard of superannuation balances being drained by the cost of tax? Has Ms O’Dwyer ever met a claimant whose only protection came via their industry super fund and the difference it made to their lives (no matter the inadequate the cover)? Me thinks not….but carry on leading us over the cliff.

I suspect that O'Dwyer and her minions might be responding to reports that disability and lost income insurance held on behalf of temporary and part-time workers is mostly worthless. Perhaps the appropriate response is a superannuation contribution threshold below which insurance is Opt-in?
I remember the early days of compulsory super where small balances were regularly reduced to zero by "management fees".

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