Australia: Productivity Commission calls for overhaul of insurance in superannuation

| 15 Jan 2019

Australia's Productivity Commission has recommended an overhaul of default life insurance through superannuation, reported A.M. Best.

According to its “Superannuation: Assessing Efficiency and Competitiveness” report, around 12 million Australians have permanent disability and income protection cover through their super, with the group insurance arrangements making it much more affordable for most of the members.

But the commission noted not all members receive good value from their insurance, especially those low-income members and those with irregular jobs.

Its report revealed that premiums from insurance were eroding members’ retirement balances. The commission noted low-income members could cut their retirement savings by 14%, while members with intermittent work could lose up to 28% of their retirement balance.

It added that around 17% of members have duplicate policies across multiple super accounts — eroding their retirement balances by more than A$50,000 (US$35,911). Some members are also being defaulted into “zombie policies” or insurance they are ineligible to claim on such as income protection cover.

“Wide variation in the types and levels of default cover (as well as premiums) across funds does not seem warranted based on inherent differences in each fund’s membership cohort. In many cases, member circumstances and needs vary more within than across funds — but funds typically collect little data to tailor default insurance to their members,” the report said.

The commission’s report also revealed other “questionable practices,” including extremely complex and incomparable policies, which impede member decision making; difficulties in interacting with funds, particularly to opt out of insurance and to make a complaint; and the bundling of life and disability insurance, which makes it difficult for members without dependents to opt out of life cover while retaining their disability cover.

For default insurance to work for members, the report recommended a halt in creating unintended super accounts, particularly for young members. It added insurance should be made “opt in” for members younger than 25 rather than the current “opt out”.

“Many young members work in casual or part-time jobs, and have relatively low financial commitments and/or no dependents to support, meaning life insurance is simply not of value to them,” the report noted.

The report also suggested to cease insurance cover on accounts that have had no contributions for the past 13 months to help remove multiple policies and reduce the risk of members holding “zombie” insurance policies.

The commission also called for a joint-regulator enforcement of voluntary code of practice for insurance and make it binding for all funds that offer insurance within two years.

And to answer whether insurance should be funded through super, the commission recommended the government conduct an independent public inquiry into insurance in superannuation within the next four years.

The inquiry would evaluate the effectiveness of the initiatives to be introduced, examine the interaction of insurance in super with other schemes, and to consider whether “opt-out” arrangement is an efficient way to provide assistance to people in the event of illness and injury.

A.M. Best also reported in July last year, the Australian Prudential Regulation Authority expressed its opposition to government proposals that would require super funds to offer insurance only on an “opt in” basis for members younger than 25, for members with balances less than A$6,000 (US$4,440), and for members with inactive accounts, saying it will likely lead to funds charging higher premiums.

“The precise impact of the insurance proposals is difficult to assess at this time; however, it is likely that the removal of these members from the ‘default’ insurance pool (together with the removal of members with inactive accounts) will create upward pressure on premiums for the remaining insured members,” APRA Deputy Chairwoman Helen Rowell told a Senate inquiry.

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