The days of super funds reviewing their insurance policies every three years are over, with up to three upgrades a year becoming common practice according to deputy chief executive of the Australian Reward Investment Alliance, Paul Watson. “It is now not uncommon for funds to roll their product disclosure documents up to three times a year just to integrate continuous insurance enhancements,” Watson told the Australian Institute of Superannuation Trustees at an insurance symposium last month.
New legislation introduced on July 1 this year, requiring all employer default funds offer prescribed minimums of death insurance cover, highlights how intertwined insurance and super have become. The “core purpose” of the sole purpose test is now not only to provide a retirement benefit, but must include death cover as well.
However Watson said the real competitive action between funds was under the “ancillary purposes” of the sole purpose test, in areas such as employment termination insurance and income protection for temporary disability.
Watson said super funds have largely focused on improving in three main areas: the range and mix of insurances, the sum insured, and relative price. “Funds not actively competing on these [three] fronts, whether public offer or not, risk falling behind and off the radars of employers and members.”
However, he also warned of the other extreme: trustees going overboard to improve insurance. He said trustees risked not acting in the best interests of existing fund members in a bid to introduce new-fangled products to attract prospective members.
SuperRatings managing director, Jeff Bresnahan, thought this was already happening at many funds. At the same insurance symposium, Bresnahan blasted funds for “ramping up” the default cover – at a significant cost to members – without enough consideration of what it will do to members’ retirement savings in the long term. “I think some of you have gone too far,” he said. “Members who were paying $100 may now be paying $400 a year. That’s a big chunk of money for someone on an average income and is going to have a big effect on eventual retirement income,” he said.
He challenged the opinion put forward by Watson that insurance was an important issue on the fund raters’ radars. “Are you doing it for brownie points from [SuperRatings]? Well, we don’t rate it that highly.” However, Bresnahan did concede SuperRatings has increased the weighting of insurance in its overall rating calculation. Whereas last year the insurance category made up 7.5 per cent of the final rating, this year it moved to a 10 per cent weighting.
Bresnahan lamented the lack of education and member awareness around the level of insurance they are paying for in a default option. Watson pointed out while members and their families may not be engaged with insurance now, come the time of an injury or death, their focus on it will be acute. “It’s then that the utility and benefit of a good, well-considered and modelled default benefit will be evident and this more than nearly any other role of the trustee will positively affect people’s lives.”
Watson also presented research which would appear to confer with Bresnahan’s comments on some exorbitant default insurance levels. ARIA’s group insurer, AIG, commissioned Rice Warner Actuaries to research appropriate levels of cover for various age groups.
If Rice Warner’s recommendations for minimum default cover were to be graphed, they would be best described as a bell curve from the youngest to oldest ages, Watson said. This is completely different to the typically linear, downward slope of most funds’ benefit design, including that of ARIA.
The deputy CEO added that ARIA had entered its group insurance review with AIG last month with a “particular goal of determining the extent of the underinsurance level faced by our members”.
However, the fund discovered that while many older members were not adequately covered by default arrangements, younger members were often over-insured when compared against the Rice Warner recommendations. Watson said changes to the default benefit design were underway.