Insurance in Super – The Way Forward

As most actuaries in group insurance can attest to, the last couple of years have posed a range of challenges, with increasing scrutiny on the industry from a variety of examinations into its processes and conduct. The landscape will continue to evolve in the near future with further inquiries expected. So what does this mean for actuaries working in insurance in super?

In March 2019, a panel of actuaries from the Insurance in Super Working Group of the Life and Wealth Management Practice Committee (LIWMPC) shared their views on the implications of the recommendations from the various inquiries and legislation changes to date and the role that actuaries could play in transitioning to the new environment.

Overview of the current Insurance in Super Landscape

Michael Lin from TAL opened the session by drawing out the three key issues that Insurance in Super needed to address:

1. Member awareness and understanding of insurance terms and definitions.
2. Affordability and sustainability of insurance premiums, including addressing any cross-subsidies that exist.
3. Fundamentals of group insurance where access to default cover via opt-out arrangements is now being challenged with recent government bills proposing opt-in insurance for certain cohorts of members. What social impacts could this have?

Michael shared a 2018 snapshot of the various inquiries the industry has had to respond to and the key themes surrounding the inquiries:

Figure 1: 2018 – the year insurance in super made the most news headlines, from Michael Lin’s presentation

In 2019, we have seen the release of the Superannuation Productivity Commission (PC) report in January, the Royal Commission Final Report in February and the passing of an amended Protecting Your Super (PYS) bill. A new Putting Members’ Interests First Bill has been drafted and further investigations may emerge from the ASIC Report on the review of TPD products.

The PC report also calls for a future independent inquiry to look into whether insurance should exist in superannuation at all.

Implications from recent inquiries

Dale Jackson from Ernst & Young explored the implications from some of the key recommendations from the PC and Royal Commission Reports.

From the PC report:

• Default fund selection (i.e. best-in-show / top 10 list) will result in a more competitive process to determine the flow of members into funds. This could lead to pressure to reduce premiums or change benefit design to obtain top 10 status. Funds outside the top 10 will need to consider implications on premium growth, scale and cross-subsidies.
• Elevated member outcome tests will see withdrawal and transfer of members out of poor performing options. While the focus is on investment returns, it is easy to see how this could be extended to benchmark insurance premiums as well.
• Insurance recommendations included publication of balance erosion trade-offs which could lead to greater opt-out on certain membership cohorts, altering cross-subsidies. A further independent inquiry into the appropriateness of insurance in super will further challenge the fundamentals of group insurance.

From the Royal Commission report:

• Application of the unfair contract terms provisions to insurance contracts may see some current terms and conditions accepted as industry practice, challenged in court and potentially leading to increased claims cost and higher premiums.
• Enforcement of the current voluntary Insurance in Super Code may change the interpretation and application of the premium cap component of the Code.
• The legislating of universal terms is intended to address the variation in TPD definitions that exist across funds and even within funds and to allow greater comparability of cover between funds. However, the following will need to be considered and debated:
  • For truly comparable cover, consistency across a wide range of terms could be required e.g. TPD and disability definitions, eligibility, default cover levels, exclusions etc.
  • Is the objective to provide a minimum level of cover or to provide consistency for comparison? If universal terms are set too strict, and assuming funds can choose to provide superior terms, what does this mean for comparability? On the contrary, if universal terms are set too loose, how will this impact the premium caps within the Code?
  • Could universal terms result in no cover being provided to certain high risk cohorts?

The key implications are for pricing (if terms change materially with no relevant experience data and keeping pricing within the premium caps), sustainability of cover (may become difficult to offer cover to some cohorts) and adequacy of cover (if cover is enhanced by universal terms).

The implications from these recommendations will no doubt continue to be debated and Dale encouraged actuaries to bring their perspective to these debates.

The Way Forward – Implications for Actuaries

Finally, Adrian Fortescue from Munich Re revisited the role actuaries and superannuation trustees play. He drew on a conclusion from the Dialogue paper by Andrew Brown on Building Adaptive Capacity  that “the challenges articulated in the APRA report and the Interim Report to the Royal Commission require thinking beyond the immediate solution to a much deeper understanding of the longer-term consequences of actions.”[1]

“Community expectations” will no doubt be the focus when examining questions around whether members under 25 require insurance cover, sustainability and affordability and cross-subsidies going forward. For example, will removing cross-subsidies disadvantage younger members who for years have been subsidising the older members, and going forward will need to pay more again? 

With the removal of inactive members, the future could see personalised offers for members that are price competitive and the development of a life-long association with the super fund through enhanced communication and engagement strategies. Technology will continue to play a key part in developing these strategies.

Universal terms for TPD may see TPD ceasing to be offered if not sustainable and a move towards an income based benefits design.

In addition, the recommendations from the PC report will see fewer funds as a result of mergers. This may shift the level of competition between insurers and reinsurers and different models may be required.

Adrian closed the session by reminding actuaries to continue to be informed and adaptive to change. Innovation will be required and community expectations should continue to be front and centre of mind.

A key point that resonated with me during the audience discussion was the role education could play in addressing issues such as duplicate accounts and account balance erosion. A main cause of these issues is around the lack of member engagement and awareness of a complex superannuation system.

Perhaps we as actuaries need to play a bigger role, not just in educating trustees, but in finding ways to promote financial awareness and literacy in schools.

This will hopefully allow the future generation to be properly equipped to navigate what is likely to continue to be a very complex system.

CPD: Actuaries Institute Members can claim two CPD points for every hour of reading articles on Actuaries Digital.