The Actuaries Institute’s Pre-Budget Submission encourages timely Government action to introduce and promote Comprehensive Income Products for Retirement (CIPRs); facilitate the rationalisation of life insurance legacy products; and implement stronger risk mitigation measures to protect against the potential impacts of climate change.
Each January the Institute makes a submission to Treasury aimed at influencing some of the policy initiatives that are included in the May Federal Budget. Usually the Institute reiterates some of the policy proposals that is has advocated over the previous 12 months and occasionally, comments on recent Government decisions.
This year, the Institute’s Pre-Budget submission has been framed around proposals to help maintain the sustainability and efficiency of the superannuation and insurance sectors. By encouraging the public to protect itself against various financial risks, the ongoing pressure on the cost of social services can be reduced.
This outcome is consistent with the Government’s goal “to sensibly and responsibly restrain government expenditure” whilst continuing to “provide the services the community needs and expects” (Minister for Small Business Michael McCormack 9/12/2016).
To pursue those aims, whilst meeting community expectations, the Institute proposes the Government quickly adopt the following policy approaches:
Encouraging retirement income streams (CIPRs)
The Institute has actively outlined the financial risks facing future retirees based on their current age and wealth profile in research reports such as the ‘Longevity Tsunami’ (2012) and ‘For Richer, For Poorer’ (2015). The Government goal of protecting retirees against longevity risk is supported by the Institute. Many of those risks can be partially managed by the introduction and promotion of Comprehensive Income Products for Retirement (CIPRs). CIPRs are an outworking of the Financial System Inquiry’s (FSI) investigation of the efficiency of the superannuation system.
The introduction of CIPR-style products should deliver greater income security and protection throughout retirement. The Institute has encouraged the Government to move quickly to establish a CIPR framework and remove any social security means testing and taxation policy settings that constrain CIPR product development and consumer take-up.
Rationalisation of life insurance legacy products
The life insurance market has experienced some consumer backlash recently, due in part to outdated policy terms and conditions (including health definitions). The Institute argued for the introduction of a mechanism to facilitate the rationalisation of life insurance legacy products and the FSI Committee supported the proposal (see FSI Rec 43). This matter has been an issue for considerable time now despite general acceptance that the proposal has merit.
Further support for the reform was contained in a recent APRA parliamentary submission (PJC Corporations & Financial Services, 30 November 2016), it opined:
“The contract between a life insurer and a policyholder is very long term; it is difficult to renegotiate the terms of the product and the insurer must be ready and able, in some cases, for decades, to fulfil its obligations under the contract.
APRA therefore continues to support the FSI recommendation regarding the rationalisation of legacy life products. Legacy products become more complex and expensive to administer over time and are prone to problems such as the use of outdated medical definitions.
There are a range of legal, consumer and tax issues that inhibit an insurer’s ability to update legacy products. Introducing a rationalisation mechanism, as recommended by the FSI, would help address this issue; this, however, requires legislative change.”
The Institute agrees with APRA’s view and our submission urges Government to pursue legacy product rationalisation more vigorously. Instilling greater public confidence in the life insurance sector will potentially boost demand for risk products with the consequent effect of reducing social service payments.
Climate Change and Natural Disaster Funding
Based on expert scientific findings, the Actuaries Institute recognises that climate change is expected to have major environmental, economic and social impacts, and poses a serious risk to the industries that actuaries advise.
We estimate an annual natural peril cost to Australia of $11 billion, of which only 40% is insured. This figure excludes public assets, but does include the cost of intangible losses such as mental health and family violence as a result of natural disasters.
Accordingly, we have encouraged the Government to support policies to improve resilience against natural disasters and to design funding mitigation and adaptation measures supported by comprehensive cost benefit analyses. The Institute’s view is that a timely investment to mitigate the potential impacts of climate change will protect future budgets from significant adverse effects to the revenue.
The Institute expressed disappointment with the Government’s recent decision not go to ahead with the $200m p.a. disaster resilience fund proposed by the Productivity Commission in its 2015 final report. We believe that annual outlay could dramatically reduce the economy wide costs of increasingly intense climactic events and recommended the funding decision be reviewed in the forthcoming budget.
In addition, the Institute has repeated its call for Government to include estimates of the future costs of natural disasters to its budget in the Statement of Risks. The Statement should include both expected costs and also costs at different annual return intervals. This provides transparency and encourages planning for the expected cost of natural disasters.
Michael Rice, PPCC Convenor and Elayne Grace, Deputy CEO and Head of Public Policy will be heading down to Canberra in May to the Budget lock up so that they can report to members the important updates affecting the areas in which actuaries work.
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