Insurance Inside Super – Federal Budget Changes

Insurance Inside Super – Federal Budget Changes

A majority of the working population in Australia rely on their default insurance inside super for cover in their time of need. However, the recent Federal Budget has proposed changes that are set to shake up the way group insurance is provided for many Australians and will have a significant impact on the Superannuation and group insurance industry.

Under the proposed changes, insurance will be opt-in rather than default for members that have account balances below $6,000, new members who are under 25 years old and member accounts that have not received a contribution for 13 months or longer. The objective of the proposed changes is to stop erosion of retirement balances through insurance premiums and improve member outcomes. These changes follow the recent Insurance in Superannuation Voluntary Code of Practice for Superannuation funds but unlike the code, these changes are compulsory and need to be implemented by 1 July 2019! It is estimated that due to these changes nearly half of superannuation member accounts will lose their insurance cover.

The Actuaries Institute recently held a panel discussion on “Insurance inside super – Federal budget changes” in both Sydney and Melbourne, which was led by Richard Land – Head of Insurance, Australian Super. Other speakers on the panel were Michael Lin (Senior Pricing Manager at TAL and currently the secretary of the Actuaries Institute Insurance in Superannuation working group) and Hoa Bui (Partner In Charge, Actuarial and Financial Risk at KPMG Australia). The sessions generated a high level of interest amongst members of the actuarial community and over 250 members of the Institute (including myself) were fortunate enough to attend this interesting discussion. Key issues covered in the discussion were challenges for superannuation funds and group insurance providers and other unintended consequences of the proposed changes.

Challenges for Superannuation funds:

Despite industry wide recommendation for a later deadline, the Senate Economics Committee reviewing the legislation has recommended the Bill be passed without any changes. The measures under the legislation which will result in 50% of members losing their default insurance cover leaves little time for superannuation funds to renegotiate insurance contracts with their insurers, send member communications, update administration systems and processes and train customer service staff by 1 July 2019. This introduces significant operational risk. Fairness of member outcomes is another issue that the funds will need to address. For example, members who lose their cover due to changes may need to opt-in (even though they have paid premium for many years and their health have has deteriorated) and funds and insurers will need to decide whether or not these members will be underwritten to reinstate their insurance cover. Opt-in members who work in high risk occupations or are involved in risky activities or whose health has deteriorated over time may be denied cover or may be granted cover with a steep loadings. Is this a just outcome for a member who has paid insurance premiums for years and has now become an opt-in member?

Challenges for Group insurance providers:

Just like any other insurance, group insurance is a pool and the removal of younger members and other default members will have a significant pricing impact on remaining members in the default pool. Also, expense margins are likely to increase as expenses will not decline in the same proportion as reduction in premiums from removed members. This is anticipated to lead to price increases which would depend on the fund size, membership profile of the fund and premium rate structure. Various risk mitigation measures will also be adopted as the risk profile of the membership will change due to increase in anti-selection from opt-in members. Additional pricing assumptions will be required for increased claims uncertainty.

Unintended consequences:

Hoa spoke about the modelling she and her colleagues at KPMG performed to estimate the impact on retirement benefits of the current default regime and also of the proposed regime. Hoa highlighted major sources of information that were used and the difficulties encountered in undertaking such a task.

It is a well-known fact that many workers in Australia have more than one superannuation account. The speaker highlighted that the key contributor to account balance erosion was the issue of multiple accounts rather than insurance, as members with multiple accounts are likely to have only one active account leaving other dormant accounts vulnerable to erosion from insurance premiums. Consolidating these multiple accounts (a task that can be handled by ATO) can alone solve majority of the account balance erosion problem.

Another key observation was that the real cohort that needs to be protected from insurance premium erosion are low income earners or women as they are most impacted rather than younger/inactive members. Reducing insurance cover for younger members is likely to increase the underinsurance problem in Australia and ultimately the social burden on the government.

The discussion was wrapped up with a very interactive question and answer session in which the speakers thoroughly answered questions brought up by the attentive audience. Audience on webinar also participated in the question and answer session using the web based application sli.do. At the end of the session, many in the audience left feeling that despite putting in all the hard work into the material insurance changes, the government objectives may only be partially met if insurance premiums were to rise for default members and opt-in members were to face underwriting and/or premium loading.

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