The Productivity Commission (PC) has signalled that it will be strongly interrogating whether insurance within superannuation is actually delivering the most cost-effective outcome for members.
In its draft report detailing the framework it will be utilising to determine the efficiency and competitiveness of the superannuation system, the PC has made clear that it has serious questions about whether insurance within superannuation is delivering as intended.
The draft report that since 2012, superannuation trustees had been under an explicit obligation to not allow retirement outcomes for members to be unreasonably eroded by insurance premiums and that in an efficient and competitive system, it could be expected that the costs of delivering a given type and level of insurance would be minimised as trustees sought the best deal for their members from the most competitive insurance provider.
"The premiums or ‘price' of insurance within superannuation are typically considered to be significantly lower than for comparable cover obtained through retail products outside of superannuation. This is attributed to multiple factors such as: tax advantages; low-cost distribution; simple product design; and bulk purchasing," it said.
However the PC noted that whether insurance prices were competitive from an individual member's perspective would depend on their circumstances and risk profile; while duplicate insurance policies could erode any cost advantage otherwise received.
It said that study participants and recent studies had observed that insurance premiums within superannuation increased significantly in recent years, although there was considerable variation across different types of funds.
"These premium increases have been attributed to a range of factors, including a market correction or ‘structural adjustment' following a period of intense price competition between insurance providers, poor underwriting practices, and increased member awareness of their rights to make claims," the PC said.
"The Commission proposes to assess whether the cost of insurance is being minimised using quantitative indicators focused on member insurance costs and prices, and the loss ratio," it said.
"The difference in the price of purchasing insurance within superannuation compared to outside superannuation is a relevant indicator in this study," it said. "There appears to be little systematic analysis of this differential in the public domain. In principle, the differential could be measured by comparing average premiums of life or TPD insurance purchased within superannuation for a notional member (for a given account balance and age) to the costs of an equivalent product on a retail basis. An understanding of how much any price discount is explained by differences in taxation treatment will provide relevant attributional context when interpreting this indicator."