With key super reform legislation held up in Parliament, the industry now has a chance to transform on its own without waiting for a government mandate Retender’s Ilan Leas writes.
The hold-up of controversial life insurance opt-out legislation in the Senate, which would have stripped more than $1 trillion in cover from some superannuation fund members whilst raising the price for others, presents super funds and insurers with breathing space.
The original bill, titled Protecting Your Super, would have mandated that funds could no longer provide automatic insurance on an ‘opt-out’ basis to any member whose account balance was below $6000 or who had an inactive account (meaning no contributions had been received) for 13 months or more, or who was new and joined under age 25.
Industry stakeholders, including regulators and consumer groups, raised serious concerns about how this measure removing insurance from younger, lower-income, higher-risk members, predominantly women.
Insurance and superannuation advisory firm Retender estimated this would lead to more than $1 trillion of cover disappearing overnight, and also highlighted that members keeping their cover could potentially have a significant increase to their insurance premiums in cases where some groups were being subsidised by others.
So, with nearly all members negatively affected due to cover being removed or prices going up, the insurance component of Protecting your Super might have been doing the opposite in terms of protecting consumers.
Added to this was the requirement to implement these changes by July 1, 2019, which some commentators described as reckless.
Labor has proposed a number of carve-out amendments, in particular one to allow the Australian Prudential Regulation Authority to carve out funds, or cohorts of members within funds, with a demonstrated need for insurance. But it now appears that the bill may be shelved, possibly until after the election next year.
This creates an opportunity to refocus from lobbying for changes to the bill to delivering counter-proposals to members. Alongside this, implementation of the industry voluntary codes will still be required, along with changes as a result of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, the Parliamentary Joint Committee’s inquiry into life insurance, the Productivity Commission’s report on super, and various other regulatory changes.
Three areas that industry should focus on are:
- Reconsidering any benefit design changes required: The expanded window provides an opportunity to rethink the structure of group insurance arrangements, especially to consider an increased focus on affordability (rather than just need), sustainability and adapting the model to cater for community expectations.
- Re-introducing competition: Under Protecting Your Super, funds would barely have enough time to get one price from their existing insurer and implement changes. This process wouldn’t have passed the best-interests test. Funds will have various views on the future all require an arm’s-length assessment of the appropriateness of the cost of the changes to members. One option is a costly and operationally complex traditional insurance tender but trustees could instead consider the quicker and less-expensive process of asking the nine active reinsurers in the market to provide terms on the risk component of members’ premiums (accounting for 80 per cent-85 per cent of the total premium).
Figuring out the life insurance value proposition: The life insurance industry has lost nearly all ground in recent years around trust, going through a very public wake-up call that exposed failures to meet community expectations. Low engagement and complexity have also led to a lack of consumer understanding. The temporary reprieve on the launch of legislation provides an opportunity to re-engage with consumers to demonstrate the insurance value proposition.
The bill may rear its head again, particularly if the industry doesn’t make changes voluntarily, but rather than being forced to adopt a government position, funds can now deliver the best suggestions that emerged during the Protecting Your Super debate on “optimal ways to achieve better outcomes for consumers”.
We are in a moment of unprecedented system-wide change and there is no excuse for not taking the opportunity it presents to transform for the best interests of members.
Ilan Leas is managing director at Retender.