Actuarial research house, Rice Warner has warned Canberra that forcing opt-in only life cover inside super for active members with low balance accounts will harm the insurance industry and hurt many members.

As the industry still scrambles to embed the Protecting Your Super reforms introduced early this month – which removed default group cover for inactive accountsthe government has moved swiftly to reintroduce the Putting Members’ Interests First Bill.

Under the Bill, default cover can only be offered to members under age 25, and to those holding low-balance active accounts of at least $6,000 on an opt-in basis, from 1 October 2019.

Generally speaking, Rice Warner supports the proposed new reforms, as well as those already introduced, due to the importance of designing insurance that does not inappropriately erode superannuation account balances.

That said, the research house warned a significant portion of members will be under 25s who typically make lower contributions due to lower salaries and intermittent working patterns and who will have not yet had time to accumulate much of a balance. Hence, the account balances often fall below $6,000.

“This segment will be addressed by the proposed legislation to remove default opt-out insurance for under 25s,” according to the firm.

“We note that those members in high-risk occupations can opt-in but funds will need to market extensively to them as we know that insurance is not front of mind for most young people.”

Rice Warner said a significant number of members are over 25 years but are simply new to super. “On average, a member may take approximately a year to reach an account balance of $6,000, but for many on lower salaries, or working part-time, they will take longer, perhaps two or more years.

In addition, the firm went on to say, it may prove difficult to determine the exact point at which cover turns on and off, leading to issues at claim time and inevitably, member complaints to insurers and funds.

“Insurers may see a greater risk of manipulation by individuals and introduce more prohibitive terms, or higher premiums, to defend themselves from potential anti-selection,” The actuary also cited practical difficulties in implementation, risk of error and increased administration costs that are spread across all fund members.

Rice Warner called for the new reforms to be delayed nine months to 1 July 2020.

“Given the significance of the changes, funds will need to again renegotiate the terms of their contracts with insurers.” the firm stated.

“Funds and insurers are still grappling with the PYS changes, in terms of pricing investigations and negotiations, and how to implement the changes. We are aware that for some Funds the call-centres are struggling to manage the spike in member calls coming through following the PYS changes alone.

The heated debate over whether it is right or wrong to make insurance opt-in for under 25s, has polarised the industry, according to the firm.

“Statistics tell us that 10 per cent of under 25s have dependents but this increases to 20 per cent in rural areas, and that a more significant proportion have mortgage debt.”

The superannuation specialist argued that industry stakeholders will use these same statistics to argue that insurance is necessary for under 25s or that it is not necessary, making it hard to reach a consensus.

Elizabeth Fry has been a financial journalist for more than 25 years and has written for a number of publications, including CFO, The Financial Times and The Australian Financial Review.
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