Balancing act: cover vs risk

By

15/12/2018

The Protecting Your Super package still waiting for resolution from Federal Parliamet dramatically changes the concept of group insurance, giving trustees much to think about when considering greater restrictions to protect premiums writes Rice Warner senior consultant Andrea McDonnell.

Trustees have a range of new issues to deal with when considering implementation of the Insurance in Superannuation Code of Practice, the findings of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry and the expected implementation of the Protecting Your Super Package.

One of the key issues is balancing the provision of meaningful insurance cover with the avoidance of excessive risk.

The Protecting Your Super package dramatically changes the concept of group insurance.

The traditional concept is that cover can be provided without the need for underwriting because the type and level of cover are chosen by a trustee or employer and it starts automatically when the person joins an employer. In this way, cover is provided to a cross-section of the working population, commencing at a time when the member is generally in good health.

This contrasts with retail insurance, in which the individual selects the time,
type and amount of cover.

Superannuation funds have adopted processes for offering voluntary cover to members, either where the member isn’t eligible for automatic cover or when they require additional cover above the default level.

Under the Protecting Your Super Package, cover will start at a range of different times; for most it will not be on the date they first join their employer or the fund, because they will need to be aged 25 or more and have an account balance greater than $6000 to be granted automatic cover.

This creates a risk that some members may manipulate the time at which they obtain cover so that it will be when they know they are more likely to make a claim; for example, by making additional contributions or transferring a balance from another fund to obtain automatic cover.

This may not seem like a significant issue but life insurance is claimed by a small percentage of members in any one year. It may take only a few extra claims (due to covering a small number of additional extreme-risk individuals) to have a significant impact on rates.

There are several possible approaches to dealing with this risk, some of which funds will already have in place. At a high level, they can be grouped as follows:

Full underwriting provides a high level of risk control, with the following possible consequences:

  • Few members may obtain cover due to the time needed to apply
  • Some members will be unable to get cover due to health situation
  • Additional costs unless heavily automated
    • In effect, pushes the underwriting to claim time
    • Could be viewed negatively if overly restrictive
    • Need to consider how far back to look at conditions and for how long the exclusion will lastExcluding pre-existing conditions provides medium-high risk control with these consequencesAnother approach, short-form underwriting, offers medium risk control but may put some members off applying. Meanwhile, tightening eligibility rules can provide a medium level of risk control when combined with the other controls mentioned here.For funds, it is important to consider what terms are reasonable for switching on cover in all situations, including when members obtain cover for the first time and when they obtain it after having it switched off.

      Whilst many funds will want to apply as few restrictions as possible, thought needs to be given to the risk of premiums increasing for all members.

      When the insurer provides its pricing, it should explain what terms have been allowed for starting, stopping and re-commencing risk, and advise whether the price takes into account only Protecting Your Super changes or has allowed for changes in the claims experience when making assumptions.

      Further, the insurer should explain what allowance has been made for members deciding to opt into or out of cover and whether this aligns with fund expectations.

       

     

     

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