The Insurance in Superannuation Industry Working Group is seeking feedback on a range of proposals around how the sector might develop and adopt a consistent set of rules. This would include the capping of premiums for insurance cover provided automatically to members and deciding when this cover begins, continues and ceases.
Settling these issues would help trustees ensure we strike an appropriate balance between making sure members get good value in insurance cover and preserving their retirement savings. It could also improve community knowledge and acceptance of how insurance in super works.
Those of us who work in the group insurance industry justifiably pride ourselves on the service provided to fund members, their families and the community more broadly. But we have to acknowledge that, for some members, the result is sub-optimal. We can do more to improve our value proposition.
Industry Working Group (ISWG) was formed in November 2016 to identify the key areas where reform is needed and develop a code of practice for trustees, supported by guidance where appropriate, for the ultimate benefit of fund members.
The ISWG has made too many proposals to address in one short article but there are two that I would like to highlight.
Automatic (or default) insurance is the only life or disability insurance most workers have. Group insurance provides cover to many who, even if they could afford it and wanted to, would be excluded from purchasing individual insurance due to pre-existing health conditions. The downside is that the premiums can erode some low-income members’ ultimate retirement balance.
Should there be a limit on the amount of cover automatically provided? The problem with that is that different funds
have members with different insurance needs and the cost of cover might vary.
It would appear to unnecessarily constrain the trustee.
It is premiums that erode retirement balances, so the ISWG is suggesting a cap on automatic insurance premiums. This might be a simple dollar amount, a percentage of compulsory superannuation guarantee contributions, a maximum erosive impact on projected retirement balances, or another measure or measures. The cap may even need to change by age.
Work is under way to determine the optimal limit, with the objective of ensuring it protects against balance erosion for all types of members – those with small or large account balances, low or high salaries, full-time, part-time or casual employment and other characteristics.
One of the more challenging aspects of group insurance design is when cover starts and stops. Should insurance cover commence only once a member’s account has reached a certain balance, so that premiums do not represent a significant proportion of their savings? On the other hand, would that mean thousands of members would not be covered at an important time in their lives – just after they have started work?
Continued and unbroken cover is clearly important for members. On the other hand, continuing to deduct premiums once a member has stopped receiving contributions (from their employer or otherwise) can have a severe impact on their retirement balance. Trustees must balance these competing objectives.
The ISWG believes the industry should work towards common rules for continuation and cessation of cover.
To date, the working group has published three discussion papers on: account balance erosion due to duplicate insurance premiums, claims handling, and member communication and engagement. Six further discussion papers will be published over coming months, covering topics ranging from total and permanent disability definitions to insurance data.
These are available on all the industry association websites and feedback is encouraged, particularly from fund executives and trustees.
I encourage all readers to review the discussion papers and provide feedback to [email protected]
Richard Weatherhead is the head of insurance at AustralianSuper, the nation’s largest industry superannuation fund, with more than 2 million members and $110 billion in funds under management.