Lifeskills: Big problems with changes to insurance in super
With all the white-hot noise from the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, it’s not hard to see why the release of the Senate report on the Protecting Your Superannuation Package Bill 2018 slipped under the radar.
Yet support for the bill, with its sweeping changes to insurance in super, may have implications for the retirement incomes of all Australians and the availability of valuable insurance for millions of fund members.
The legislation would change default insurance arrangements in super, moving insurance to opt-in for members under 25, those with accounts with no super contributions for 13 months and small accounts under $6000.
It also caps administration fees, bans most exit fees and includes new measures for consolidation of inactive small accounts into active accounts by the Commissioner of Taxation.
The start date for the new measure is July 1, 2019, with no transition period.
The Senate Economics Legislation Committee, headed by Liberal Senator Jane Hume, was referred the bill for inquiry and report. The committee received more than 30 submissions and took oral evidence in Sydney before publishing a report on August 13, 2018.
The majority of the committee recommended that the bill be passed with no amendments. However, the Labor members published additional comments that noted concerns regarding the default insurance arrangements, the start date, and the fact that fund consolidation was to be conducted by the Australian Taxation Office, rather than fund-to-fund. They supported the intent of the bill to minimise account erosion but flagged that they would consider amendments to improve the insurance arrangements.
Perhaps the two biggest issues identified were the potential for premium increases and harsher underwriting for some members – considering the changes in demographics and critical mass of the risk pool – and the potential problems with costs, underwriting and premiums – created by the 2019 start date.
The removal of young members and those with inactive and small accounts from default insurance would increase premiums for remaining members by 26 per cent, KPMG has calculated, which would wipe out the savings to account balances generated by the reform measures. Treasury put the increase at a more modest 7-10 per cent and the Senate report asserted that any increases were simply reflective of cross-subsidies, particularly for young members, which should be removed. However, this confuses legitimate questions about poor targeting of death cover for young members with cross-subsidies that are inherent in any insurance product.
Many submissions raised particular questions about removing default cover for members with active accounts under $6000. The peril identified, including in the Senate report, was that small accounts could be eroded and ultimately lapse because of insurance premiums. However, this would occur only with inactive accounts and not new accounts with ongoing superannuation contributions.
Excluding new active members over 25 years old from insurance cover until their accounts reach $6000 would exclude them from valuable insurance cover for upwards of two years, during which time they run the same risk of disability but without cover to protect their retirement incomes. This would particularly effect indigenous Australians, new migrants, casual workers and women returning from maternity leave, who often have small accounts.
The majority of the report suggests that those who lose insurance cover would still have access to other support from the Disability Support Pension (DSP) or Workers Compensation and could opt into cover. However, this betrays an ignorance of the harsh DSP eligibility requirements, makes assumptions about automatic opt-in cover, and confuses income replacement benefits with superannuation retirement benefits.
The report acknowledges the submissions by industry and regulators about the July 2019 start date for the new measures. Insurers, re-insurers, superannuation funds and the Australian Prudential Regulation Authority were as one in submitting that a July 2019 start date was unrealistic and would lead to higher costs and premiums.
Superannuation funds would be scrambling to negotiate new group contracts with insurers who would have no choice but to design contracts (with no equivalent claims history) conservatively. If a fund received an unsatisfactory quote, it would not have time to go to the market to obtain a better deal for its members.
With all funds facing the same start date, there would inevitably be a serious lack of competitive rigour. Further, with a limited number of fund administrators available to facilitate and implement the necessary administrative and disclosure regimes, funds would undoubtedly be paying a premium for these services.
Only one submission disputed this analysis, but that opinion was based on the false equivalence of the industry’s response to the introduction of MySuper, which largely replicated existing group insurance arrangements. That the majority of the committee agreed with that submission and not the warnings of the entire industry, and in particular the regulator, was extraordinary and, frankly, reckless.
The concerns many participants raised, which were reflected in the Labor members’ comments, highlight risks to a system that has historically delivered valuable life insurance cover to millions of Australians at wholesale rates and with little or no underwriting restrictions.
There is no doubt that there have been significant affordability problems with group insurance in superannuation in the last few years, which need to be addressed to protect inappropriate account erosion. However, some of the proposed changes and the overly ambitious timetable could wipe out most of the savings, whilst removing or limiting cover for many in vulnerable communities who may otherwise be welfare dependent.
For the sake of all Australians, it’s crucial that all stakeholders work together to resolve the outstanding issues.
John Berrill is principal at Berrill & Watson Lawyers.
For more on life insurance, register for the Investment Magazine Group Insurance Summit, the largest annual forum exploring the insurance trends affecting industry super funds, on August 28, 2018, at the Four Seasons, Sydney.