Insurance comes into focus

The final months of 2006 saw many super funds shuffling insurance arrangements. Though insurance has long been a point of difference for many funds, the increased focus that member benefits and premiums have received would seem to indicate an important role for insurance in 2007.

Mercer Human Resources partner Russell Mason believes much of the increased attention insurance offerings have been receiving is due to an acknowledgment amongst funds, trustees and executives that their members have been underinsured.

“The extent of that underinsurance becomes obvious when a young fund member puts in a claim for total permanent disability (TPD) insurance,” he says. “Funds have been forced to refocus on the level of cover that they are offering their members.”

AMP Corporate Superannuation director Greg Healy says the prime motivation behind changing insurance offerings relates to competition.

“Funds are looking to keep their insurance arrangements competitive and provide value for money in terms of cost and features,” he says. “Insurance has always had an important, though often under-appreciated, role in superannuation, and with chronic underinsurance within Australia insurance through superannuation can be part of a solution.”

Evidently, industry experts feel insurance has gained a share of the 2007 superannuation spotlight based on a newly competitive super marketplace and an increasing awareness that the vast proportion of Australians are underinsured.

Managing director of CommInsure Simon Swanson believes that focus will come in two forms.

“Firstly, funds will be looking to expand the benefits that they are offering members,” he says. “This is largely on the back of the high levels of returns that funds have been enjoying in recent years. But technology also has a role to play, particularly with respect to service and online offerings.”

According to Mason, the year ahead will involve a continuation of the same thought processes and responses that commenced in the latter half of 2006.

“I think people have, for the most part, overcome the mental barrier that insurance should cost more than a dollar a week,” he says. “Funds are now looking at what is needed to give members adequate cover. Choice has had a significant impact in this regard, causing funds to look at how they compare with other funds, where they have strengths and where they have weaknesses.”

Mason also says choice of fund coupled with recent insurance claims have increased awareness of underinsurance and highlighted the fact that although additional cover is available for most fund members, the reality is that such cover is rarely taken up.

Australian Super manager, insurance, Glenn Palmer says though the problem of underinsurance within Australia is a recognised issue to be tackled in the year ahead; the challenge is in where to find the solution.

“Solving the problem revolves around education,” he says. “It’s about people making an informed decision about their insurance needs. Australians have got to be asking themselves what their needs are and what the appropriate levels of cover for those needs are.”

Palmer says underinsurance was caused by one thing more than any other and that was fund members’ low level of interest in insurance.

“I think all funds are asking themselves the same question: How do we entice members to look at insurance in a more meaningful way?”

Mason sees many funds answering Palmer’s question by alerting their members to the benefits of insurance in various ways.

“Super funds are providing their members with insurance brochures highlighting its advantages and specific details of the cover they possess and the cover available,” he says. “Furthermore, since funds have focused their lines of communication on this area, the initial evidence has suggested good success.”

Healy suggests the key steps towards remedying the situation start with providing comprehensive education programs as outlined by Palmer.

“Funds need to provide comprehensive education programs such as online calculators and seminars as well as access to advice in a face-to-face manner,” he says. “Furthermore, default insurance arrangements must be carefully considered in terms of providing a reasonable amount and type of cover, flexibility to tailor insurance arrangements to personal needs and simple processes.”

According to Swanson, the constant underinsurance issue is also about sorting out the regulatory and taxation environment in which insurance exists.

“At the moment, we seem to have a regulatory environment in which one size fits all,” he says. “We have stamp duties when members move between funds and a system which is overly complex. Super funds and insurance providers need to work together to sort out this sort of regulatory quagmire.”

Despite Swanson’s concern over taxation and regulation, Healy points out that superannuation is still the best vehicle through which insurance can be offered to Australians.

“Insurance cover through superannuation is usually tax effective, and the proposed Budget changes of last year improve the tax effectiveness of larger amounts of cover,” he says. “Employer sponsored superannuation arrangements often make insurance cover more easily accessible and cost effective. Also, the cost of cover doesn’t have to be deducted from assets held outside super that are used for day-to-day living.”

For Mason, insurance education is one of the great challenges that the superannuation industry faces, and he believes the answer won’t come in any one single package solution. He also says that while large advertising campaigns in the same style as those conducted by industry funds in the lead-up to choice of fund might be feasible, there are large doubts about whether they would strike the same chord.

Healy says financial advisers could also play a role in increasing insurance awareness.

“Financial advisers can play multiple roles,” he says. “Firstly, they can advise an individual on the appropriate amounts and types of insurance for that person’s needs. They can also advise an employer on the insurance arrangements made available to their employees through determining the default amounts and types of insurance, negotiating automatic acceptance limits and ensuring there is sufficient flexibility to enable members to tailor their cover to their needs.”

Swanson also sees financial advisers playing a more important role in insurance education.

“Basically, I’m not sure how a financial adviser can be an adviser without offering insurance,” he says. “They are in a position where they simply have to advise on risk needs. They have a huge role in making sure the products and services their customers already have remain relevant.”

Alternatively, Palmer says he does not think the role of financial advisers is necessarily becoming more important in terms of insurance offerings.

“Advisers will always have a role to play in talking to people about their insurance needs,” he says. “But it’s difficult to get people to talk to financial advisers about anything, let alone insurance. The problem is, people generally talk to advisers at the end of their working life when they need to be realising that insurance is a long-term venture and talking to them much earlier.”

Despite the clear concern regarding underinsurance in Australia, that concern is clearly not the only motivating factor behind funds looking to improve their offerings.

Mason sees funds’ shuffled arrangements as proof they are still looking to use insurance as a point of difference, particularly with respect to income protection.

“The main means for differentiation come in the availability of income protection, how it’s related to occupation and salary, the level of default cover and medical requirements,” he says. “And with respect to these key areas, there are still obvious differences between funds.”

Healy believes that in some ways the vital role of insurance means it is that much more important to be able to provide a differentiated offer.

“Insurance needs can differ significantly between individuals or groups, and a one size fits all approach is unlikely to be able to satisfy those varying needs,” he says. “Employers and members under a choice of fund environment are today seeking more flexibility under group insurance arrangements.”

However, coupled with the battle to engage fund members in making choices regarding insurance is the fight to convince them of the value and worth of their cover, and not to quibble over possibly increased premiums.

According to Healy, the simple insurance reality is that increased cover translates into increased premiums. However, he agrees that premium levels are a significant concern for many fund members.

“Members are generally quite conscious of the amounts deducted from their benefits,” he says. “Trustees need to carefully consider the changes to levels of cover for existing members and default cover for new members.”

Healy says that in practice, insurance cover usually decreases as age increases whereas premium rates increase with age.

“Overall, the cost of cover does not have to vary significantly across ages,” he adds.

One approach to decreasing premiums for members on an individual basis is, of course, providing them with the option to opt out, however Palmer advises against this.

“The problem with setting a default level of cover and then enabling members to opt out is that many will take this option and then regret it later,” he says. “With premiums, it’s about setting the correct level of default cover. Besides, when looking at opt in arrangements, you’re looking at a whole range of other issues where insurers are looking for underwriting and so on.”

Though difficulties arise when looking at opt out default cover, Healy points out that a degree of flexibility is still desirable.

“In general, the best benefits for one group of members may be over the top or inadequate for other groups of members, so the amounts and types of cover should continue to vary,” he says. “It is also an advantage of employer-based plans that they can provide default cover based on the characteristics of their membership. Ideally, trustees should offer reasonable default cover and, in addition, provide flexibility for tailoring at the member level.”

Palmer says his experiences at Australian Super in relation to increasing premiums in order to increase overall cover have been favourable.

“Most recently, we have had many of our members moving from different levels of cover to $3 a week as their default,” he says. “For some, that has meant doubled premiums, but the value increase was substantial and it was promoted to members as such. We used mail outs to inform our members of the changes and have seen less than 0.5 per cent asking to reduce their cover.”

There is little doubt that much of the increased attention insurance has received in recent months has been due to choice of fund. However, choice has also highlighted issues regarding a loss of benefits occurring when members switch funds.

According to Mason, it is an issue that is definitely on the radar, but not one that has occurred significantly yet.

“Thus far, fund switching has mostly aligned with the turnover of employment,” he says. “But it is inevitable that this kind of thing will happen in the future. Members have to be very aware and alert to the possibility that changing funds may mean losing cover. Furthermore, it is incumbent upon employers and trustees to ensure members are aware of the different aspects of funds, particularly with respect to insurance.”

Palmer also sees this as a sleeper issue. He says one approach, employed by Australian Super, is individual matching arrangements.

“We have in place systems enabling people to have their group cover matched,” he says. “And we can also do it on a group basis for employers.”

A great deal of improvement in terms of the insurance offered by super funds occurred in 2006, but, according to Healy, the job is still a long way from done.

“Trustees should continue to educate members and employers on their insurance offerings,” he says. “They should also review their insurance arrangements from time to time to ensure the defaults are reasonable and that there is sufficient flexibility to allow members to tailor their insurance arrangements to their needs.”

Overall, it is about solving the smaller issues in order to solve the larger problem of underinsurance for Palmer.

“We clearly have to provide improved offerings and flexibility to our members, but we have to ensure that flexibility doesn’t confuse them,” he says.

“The challenge for 2007 is making fund members understand their insurance and how best they can use it.”