The role of insurance in superannuation is topical but more importantly core to the superannuation offering and intrinsically linked to its purpose. When looking at the outcomes for superannuation members and Australians, the value is undeniable compared with the alternative. At the heart of the debate is the balance of adequacy in default insurance in super funds versus the potential erosion of super balances due to built-in premium structures.
This issue has engaged the Parliamentary Joint Committee on Corporations and Financial Services and the Productivity Commission, with their reports due in late 2017 and mid-2018, respectively. It is also on the agenda of the Insurance in Superannuation Working Group (ISWG) that has issued a draft code to be finalised after industry discussion.
The current policy relating to default insurance in superannuation is fundamentally sound for individuals, their families and the community. This is not to suggest the system can’t be improved, and the ISWG is working on maximum premium limits and auto-cessation rules to protect superannuation balances from being eroded.
Default insurance offers a vital benefit for all Australians: By providing a private sector solution, the system is limiting the cost to the public purse. Research by the actuarial firm Rice Warner found the removal of default insurance would cost the Government about $5.7 billion per annum.
Breaking down the Rice Warner report gives an insight into the critical role that super funds play in providing insurance cover; about 50 per cent of all death and income protection (IP) cover is through super, and 70 per cent of total and permanent disablement (TPD) cover.
It was the report’s findings in relation to TPD cover, in particular, which revealed there would be serious fiscal ramifications if all default cover was removed, estimating it at $2.49 billion annually. This figure only reflects social security payments; it excludes lost tax revenue and spending capacity.
But it’s not just about fiscal ramifications. The report reminds us that death or disablement can have a serious impact on families, especially as insurance benefits are considerably higher than social security benefits.
This factor assumes greater importance when considered in relation to rising debt levels, with one estimate showing more than 60 per cent of mortgage holders have debt equal to more than three times household income. In addition, a third of loans have less than one month’s mortgage repayment buffer.
The tragic implication that can be drawn from these estimates is that without insurance through super, many individuals or families would have to sell their house.
This outcome goes to the nub of the matter, and demonstrates why insurance should remain an intrinsic part of superannuation, and why underinsurance remains a societal problem.
Undoubtedly, the system can be refined, and the two inquiries and the ISWG code should provide guidelines. But when it’s remembered that between 2011 and 2016, 81 cents for every dollar received by group insurers in premiums was paid out in claims, then the value of this financial lifeline cannot be overstated.