Group insurance has typically been a bit of an afterthought for super funds. Sure, the insurance sub-committee members have long been immersed in it. Adjudicating in family squabbles over death benefit payments, for example, can be an emotionally-wrenching task not often associated with the work of a trustee. But for the most part, the insurance offer has been a sideshow to the business of building sophisticated investment portfolios, marketing to attract members and lobbying for a rise in the compulsory contribution rate.
How times have changed. The panel on group insurance which I chaired at the recent Conference of Major Super Funds was full to capacity. Trustees and fund staff are aware that the demand for insurance always rises in a recession, and are keen to have a positive story to tell members It’s unfortunate, then, that the news on insurance may be taking a turn for the worse just as more members are paying attention. For most of the noughties, the renegotiating of group insurance agreements was heavily in super funds’ favour.
Many funds have been able to keep the classic ‘$1 per unit per week’ price to members, but the benefits have just kept on rising. A young professional with AustralianSuper now gets $257,400 of death/TPD cover for the price of their Monday morning coffee. However, these great deals were achieved when high interest rates were providing a tailwind for insurers’ investment returns, and when the take-up of extra units by members was extremely low. The most recent research indicates only about 5 per cent of super fund members have bought extra units of cover, but that should rise as people begin to feel more insecure. The level of claims will inevitably increase too.
At the CMSF panel session, IFS Insurance Broking’s Nick Galanakis presented data showing that when Australia’s unemployment rate was 9.5 per cent in 2003, the weighted average loss ratio on group insurers’ death/TPD books was over 120 per cent, compared to just 60 per cent in 2008. As a result, I’m already hearing that boomtime perks like guaranteed rates are a thing of the past – if you want it, the fund has to pay for it. To some extent, the expected flurry of super fund mergers will add scale and keep the pricing on an even keel.