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Has group insurance dodged a legislative bullet?
At the time of Super Review going to press there were at least four group insurance tender processes underway and it says much about prevailing sentiment in the superannuation industry that the future of the Government’s Putting Members’ Interest First legislation is not a major factor in those processes.
That legislation, which is yet to be reintroduced to the Parliament, would significantly alter some of the key tenets of group insurance because it would remove the passive compulsion entailed in opting out of cover for those with low balances and those aged under 25.
According to a wide range of research, including that conducted by KPMG, the removal of coverage for under 25s and those with low balances will serve to alter the economic fundamentals of group life/risk thereby driving up premiums.
The Government has appeared largely undeterred by warnings from the likes of KPMG and actuarial research house, Rice Warner, with the Assistant Treasurer, Stuart Robert announcing in mid-February that the Government will introduce legislation into the Parliament “to protect Australians from paying premiums for insurance they don’t want, need or even know they have”.
"The Treasury Laws Amendment (Putting Members' Interests First) Bill 2019 will require insurance in superannuation for under 25-year-olds and members with low balance accounts to only be offered on an opt-in basis from 1 October 2019,” he said. “It means the hard-earned retirement savings of millions of Australians will be protected from undue erosion through inappropriate insurance arrangements.”
“Based on the most recent data, this Bill, together with superannuation reforms passed by the Parliament earlier this week, will see five million Australians have the opportunity to save around $3 billion in insurance premiums.”
“Recent data also indicates, of the around 11 million Australians with insurance in superannuation, around 2.5 million individuals have duplicate cover. Of these individuals, over 10 per cent are under 25 years old.”
“Importantly, the Government’s reform will not prevent anyone who wants insurance in superannuation from being able to obtain it – members will still be able to opt in,” the assistant treasurer said. “The Government is putting the interests of members, not insurers or funds, first.”
However, as February came to a close and with the Parliament not due to sit until the Budget session in early April, few insurers and superannuation funds appeared to believe the legislation would actually be either debated or passed before the scheduled May Federal Election.
Looking at the responses of the Labor politicians to the legislation, they had cause to be confident with few people believing it would have a life in its current form under an Australian Labor Party Government.
One of the consultants looking closely at the group insurance tenders, Deloitte’s Geoff McRae said that the uncertainty generated by the Government’s legislative approach had led many superannuation funds to delay starting their insurance review.
Further, he said that for the time being, at least, that uncertainty remained because of the Government’s mid-February announcement that it would be reintroducing the legislation.
Beyond that, McRae made the point that other factors were also in play, not least insurance-related recommendations of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, particularly those relating to the standardisation of terms to be used in all group insurance policies.
He said this was likely to provide a challenge for the industry if the standard terms were to be in the best interests of all fund members.
In doing so, McRae cited
- TPD definitions for those over age 65 or inactive.
These members would now typically be offered an ‘activities of daily living’ TPD definition. Under ‘standard terms’ they may be offered the same definition of younger members at a higher price than for their current cover. Would it be in members’ best interests for these members to have no TPD cover?
- Eligibility for income protection (IP) benefits
Many funds offer IP cover to all members without regard to the hours worked per week. For those working irregularly and for short hours, it is difficult to set an appropriate level of cover and ensure that the premium being paid matches the claim amount likely to be paid.
Would it be in the best interests of all members for those working less than 15 (or 10) hours per week to be excluded from IP cover?
While insurers and superannuation funds have remained concerned about the changes related to under 25s and those with low balances, they have proved much more sanguine about the Parliament having passed the Protecting Your Super Package legislation involving the consolidation of inactive accounts.
However, where the Putting Members First package is concerned, MLC Life chief customer officer, Retail Insurance, Sean McCormack reflected the broader view of the industry when he warned of unintended consequences, particularly under-insurance.
“We are concerned that these measures could expose members to underinsurance, especially those in high risk occupations,” he said. “We will watch the legislative process with interest, but overall we would prefer for trustees and insurers to work together to make it easier for members to opt-out, which is something we have already taken action on via our LifeView portal.”
Relative industry newcomer, Integrity Life reflected the concerns of many of the players in the sector when it pointed to the unintended consequences likely to flow from the Government’s legislative proposals.
“These changes will have unintended consequences for younger members with families that need the support of insurance cover, and those who may be unable to get opt in cover due to higher risk occupations or health issues,” the company said. “Exemptions for members in these situations have been requested by various industry groups but it is as yet uncertain as to whether these will eventuate.”
Explaining its approach to the possible new scenario, Integrity Life referenced a ripple effect which would impact the pricing of insurance because of the change in membership profile.
“If there are gaps in the data, there are assumptions made that impact on price. This can lead to conservatism and a negative impact on repricing. Conservative assumptions push up prices and ultimately the member is impacted,” it said.
“It will be important for super funds to meet their obligations to members. This might involve getting a second opinion on insurance pricing offered by their incumbent insurer in order to fulfil trustee obligations to challenge the pricing assumptions made by the incumbent
insurer,” the company said. “Trustees will also need to consider alternative products and benefit designs to allow all members of the fund access to relevant, value for money insurance cover. “
McCormack’s comments on superannuation funds and insurers making it easier for members to opt-out resonates with many players in the industry, particularly in circumstances where funds have moved unilaterally to put such measures in place in line with the Insurance in Superannuation Voluntary Code of Practice.
This much was made clear by the Australian Institute of Superannuation Trustees (AIST) within its pre-Budget submission filed with the Federal Treasury in early February.
The AIST noted that the code was developed in 2017 to improve the insurance provided in superannuation and that, amongst other things, the code provided “a framework for capping insurance premiums for default cover”.
“AIST supports group life insurance as is an efficient and cost-effective form of cover. For most people, the insurance held through superannuation is also the only insurance they hold,” the submission said.
“However, there is a need to balance this against the impact of insurance premiums which erode member retirement savings.”
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