The Insurance in Superannuation Industry Working Group (ISWG) was established in November 2016 by the major superannuation and life insurance peak bodies – the Association of Superannuation Funds of Australia (ASFA), the Australian Institute of Superannuation Trustees (AIST), Industry Funds Forum (IFF), Industry Super Australia (ISA) and the Financial Services Council (FSC).
The ISWG was set up to deal with problems with group insurance in superannuation, to develop a Code of Practice, and to design policies and products that are affordable, sustainable, and provide value for money.
It is a huge piece of work and represents the biggest shake up in life insurance since the introduction of the Insurance Contracts Act 30 years ago.
The outcomes could be of enormous benefit to superannuation fund members, people with disabilities, and the Australian taxpayer.
The ISWG, which includes representatives of superannuation fund trustees, life insurers, and consumers, has released its first discussion paper dealing with inappropriate account balance erosion due to insurance premiums.
More discussion papers will follow in the coming weeks on member communications and consistency in definitions.
Of particular importance will be the first draft of the Code of Practice, although that may be some time off yet.
AIST, FSC, IFF, and ISA have also released a Best Practice Guidance Note for data collection.
Inappropriate account balance erosion
The superannuation and insurance industries acknowledge that there are problems with members’ account balances being unduly eroded by insurance premiums and there is a need for immediate corrective action.
The objective of insurance in super is to provide a measure of financial support to members/their families whose working lives are cut short because of disability or death.
However, that comes at a premium cost to members’ collective account balances.
There is a need to get the balance right between promoting self-funded retirement for those with full working lives and providing adequate insurance to fulfil the objective of insurance in super.
The paper specifies that the median default insurance costs $240 per annum (for a 25-year-old), $260 (35-year-old), $324 (45-year-old), and $395 (55-year-old).
These group insurance premiums are very cheap compared to individual retail insurance premiums, although the gap between wholesale and retail premiums has narrowed somewhat in the last few years.
Nevertheless, the ISWG recognises that undue erosion of account balances is a problem for younger members, older members, and those with low incomes and small account balances.
There is also a problem with duplicate insurance in multiple super accounts, particularly with income protection, under which payments are offset against each other.
Further, there is the problem of lack of member engagement and awareness, a perennial problem in a compulsory product environment i.e. compulsory employment superannuation.
The paper proposes a number of corrective measures:
1. Develop principles to assist trustees to decide what cover/insurance design is appropriate for their members
These principles will look at the age, gender, marital status, occupation, salary, and household debt of members, claims history and member feedback
They will also include specific considerations such as whether young members under 25 should have capped death cover (perhaps with enhanced disability cover) and whether older members should also have capped cover given they often face higher premiums and reduced sums insured.
2. Set maximum premium levels
This may be a percentage of employer contributions, salary or account balances, or a dollar limit.
3. Develop consistent terms and conditions across super funds as to when cover starts, finishes and recommences
This would include account balance thresholds for continuing account-based cover and how continuing/lapsing cover is communicated to members.
4. Establish protocols
This should be between insurers as to which policy responds when there are multiple income protection claims and for the refund of premiums on multiple income protection policies.
5. Assist members to better understand and make decisions about their insurance in superannuation
This could include embedded consolidation options, authorised SuperMatch searches and links to other public information websites.
Finally, the paper also proposes some legislative reforms including enhancing or clarifying the ability of funds to provide limited insurance advice and abolishing minimum death cover requirements under MySuper.
Best practice guidance note
The guidance note is intended to be adopted by members of AIST, ISA, FSC, and IFF on an incremental basis to improve the quality and availability of group insurance data.
That data is to be used to help design insurance offerings with fairer pricing and improved sustainability.
The data is also to be made available to reinsurers and to incoming insurers in the event of successor fund transfers.
The data would include standard information on claims for the previous five years including cover type, personal, disability and occupational details, sums insured, claims and amounts paid and denied, denial reasons, lawyer details, and income protection claims details, etc.
Further information/documentation should also be made available including product disclosure statements (PDS), previous product designs, and business rules.
The guidance note specifies that there should be rules around how data is collected, stored and transmitted, including privacy rules.
Data should also be updated monthly and accessible at all times.
Adherence to the guidance note would be reviewed after two years with a view to then adopting it as an FSC standard.
Looking to the future
I think that the account balance paper is an important step in the right direction by acknowledging there is a need to change, identifying specific areas of concern, and raising possible solutions.
The ISWG has asked for feedback and consumer consultation meetings have occurred with more planned.
Of course, the proof will be in the pudding, which is some way off and the big one will be the Code of Practice.
But so far so good.
The data matching guidelines seem sensible. More accurate and accessible data to help trustees and insurers make informed decisions around what type of cover to offer and at what price can only be a positive.
It may avoid defensive pricing which leads to higher premiums.
The end game in all this is better targeted group insurance policies providing better value for money for super fund members. This will mean that members can be protected against early retirement from death or disability at a reasonable price.
With 70 per cent of all life insurance now held in superannuation, this can only be a good thing for consumers.
John Berrill is a partner at Berrill & Watson Lawyers.
