SPONSORED CONTENT| The future of the Australian group insurance industry depends on superannuation funds investing in member engagement, rethinking protection products and working closely with the insurers to tailor products that change with members’ needs.
Most customers don’t know what exactly they are covered for and whether the product is suitable for them, said Angat Sandhu, Oliver Wyman partner and leader of their Asia Pacific insurance practice. “For funds, this is not their core offering. And whilst it is an important channel for insurers, they haven’t made much money from it. It is clear where the group insurance industry needs to move to.”
The problem is that the wider life insurance market is shrinking. Profitability has dropped to the extent that the sector is now loss-making in aggregate, according to a recent KPMG report. Further, regulators are imposing higher capital requirements on insurers.
The consultant’s view was backed up by Australia’s prudential regulator, which in its 2019 “look-back” report said the viability of some life insurance products were in severe doubt due to “poor product design” and “aggressive” selling methods. Poor claims handling practices were also highlighted.
The overall life insurance market is faced with a number of headwinds including rising claims costs, policy lapses and intense competition. At the same time, the group insurance sector is grappling with a raft of wide-ranging regulatory changes that are sweeping across the superannuation industry. There are concerns that these changes may not achieve what they set out to do, namely to protect the consumer.
While Tyson Johnston, Pacific Life Re’s general manager for Australia, conceded that group insurance was under siege, he also said that it was the most efficient delivery mechanism for life insurance products. He said the industry could only secure a future through better use of technology to improve member experience, speed of execution, and consistency of outcomes and transparency for superannuation trustees.
The question for Johnston is whether the group insurance market can respond to the market forces that are working against it? The executive said legislation changes may see insurance premiums and administration fees increase, perhaps even by as much as 26 per cent, according to KPMG, given that some costs are linked to the membership pool size. He said sorting out the correct pooling arrangements was crucial to products being sold to members at a reasonable price.
“There’s a difference between pooling and cross subsidisation,” he said. “The insurance industry is being pressured to remove cross subsidies which leads to older members in the pool being charged more, causing them to leave. It’s about getting the balance right.”
Worried about the erosion of retirement savings caused by insurance premiums, the federal government last year introduced legislation to improve member outcomes. At the same time, the corporate watchdog was given the power to sue trustees for breaching their obligations to super fund members.
A further legislative change in April will see the introduction of Protecting Your Super (PYS) and Putting Members’ Interest First (PMIF) bills, which will also add to turbulent times for the industry and threaten the revenue of funds. Essentially, the PMIF means trustees can only offer group life insurance to those under 25-years-old and those with low account balances on an opt-in basis – further trimming the premium income to insurers.
Sandhu of Oliver Wyman said trustees were scrutinising insurance products more closely to see how they contribute to better outcomes for members. “Regulators want to know what steps funds have been taken to ensure that insurance arrangements are in members’ best interests, whether their review process is rigorous enough and whether they are really measuring member outcomes,” he said.
The consultant said while insurance was important, it was only one product and was historically not a priority for many funds who remained focussed on fees and performance and are now dealing with a lot of regulatory change.
“The challenge is there is no industry consensus on what constitutes a really good outcome, partly because the member base for funds are diverse and their needs change over time,” said Sandhu. What represents a good outcome for the member, he added, might not be as good for an insurer and whilst those trade-offs may be known, addressing them appropriately is critical in this environment.
Shane Fielding, head of insurance at the $50 billion Hostplus super fund, said the heightened scrutiny of trustees ensured that they act in the best interest of members when it comes to claims. Fielding said a big focus was on the type of definitions insurers use to assess claims. He also noted that the forthcoming Treasury review of universal terms and conditions in group insurance. The corporate watchdog has been very vocal about the variation in total and permanent disability (TPD) definitions that are used in the insurance products offered through the super funds as well as the claims-handling process.
“Perhaps we could consider developing for life insurance products, an equivalent of the National Heart Foundation Tick of Approval for certain food-types,” Johnston added. “The alternative stamp of approval would allow product trustees to easily move away from the complexities built into TPD definitions in order to increase transparency for all stakeholders and simplify the claims process.”
The Hostplus executive said the corporate regulator was examining the high number of withdrawn claims that are currently in the system. “There is a view highlighted in the regulator’s recently released report on TPD, that members are withdrawing their claims because of frustration with the claims process,” he added.
Still, Fielding called the plethora of new legislation positive as long as it doesn’t lead to a rise in costs. “The positive aspect is that funds are expected to actively address poor consumer outcomes,” he stated. “However, the solution to address the poor outcome for casuals/unemployed members may have to be addressed through changing the TPD definition so that it less restrictive. If this occurs, more claims will be paid but as a result, premiums may rise for all members. As funds, we want to pay out every claim possible that we can if a member can’t work. But that comes at a cost if we loosen up some terms and conditions.”
Sandhu is clear that for group insurance to have a future, the funds need to holistically consider members’ protection needs leading up to and during retirement. “Once trustees think about their role in terms of providing protection, as well as wealth, as part of their mandate, then the priority becomes engaging with members to better understand the members’ needs over time,” he said.
“What do the trustees and the funds themselves want that protection role to be in the future? Do they want it to be radically different to today or do they want it to be similar?”
According to Fielding, the new “opt in” legislation, where younger members have to proactively sign up for insurance, was a challenge for all funds as it also sharpened the focus on how super funds effectively communicate the benefits of insurance to members. “Many of our new members are joining at 15 or 16 and therefore won’t get insurance as a default for 10 years unless we engage them in more effective ways on a regular basis,” he said.
“While we do a good job with member engagement, we are still not fully covering the broad gamut of memberships and members want to engage with us in different ways through different forums.”
Speeding up the claims process is a big part of how Hostplus connects with members.
The industry fund set up for employees in hospitality, tourism, recreation and sport, has built an in-house claims team and service centre which has given it the “ability to engage very intimately” with members when they most need it.
While other externally administered funds have also brought claims in-house, Fielding said Hostplus was the first and as such had developed a strong claims service model. “Our trustee is very determined to ensure the entire member experience is owned by Hostplus so, in the event of a claim, the member has immediate access to us to clarify the process and run them through the eligibility checking process. This has resulted in low withdrawn-claims figures for the fund.
“The member only ever speaks to us regarding their claim whereas other funds have an administrator or an insurer taking on some of that communication which leads to confusion,” said Fielding. “This allows us to build a good relationship with members so we can discuss what else is going on with their lives. It’s not just about assessing a claim but seeing how we can support them in the future i.e. whether they suffer mental health conditions or financial hardship.”
Pacific Life’s Johnston agreed that technology will help to streamline the claims process and make it easier and faster for the member, fund and insurer, as well as allowing claims assessors to focus on what is important instead of on process-driven tasks.
Ultimately, a thriving group insurance sector comes down to how well funds engage with their customer base, he continued. “If engagement levels can increase, then funds can provide more personalisation and additional cover, perhaps even providing access to underwritten product options across multiple insurers.”
With regard to additional cover, Johnston said that members normally have access to one insurer. “I don’t think that works in the current advice climate,” he argued. “How can a trustee be comfortable that they are getting the best deal for the member who wants an individual product and price outcome when you are looking at just one insurer? It is not okay in retail since the advisor wouldn’t have met his best interest duty. It shouldn’t be okay with insurance in super.”
Oliver Wyman’s Sandhu believes it is not practical for the group insurers to figure out the best engagement strategies since funds have ownership of members and protection is rightly only part of the service they are providing.
Johnston disagrees that the onus should be purely on the funds to lift engagement. To him, funds should better leverage insurer expertise through forging strong long-term partnerships. “Currently, these partnerships are looked at through a price lens whereas the insurance offering should be considered much more holistically,” he said
That view jibes with Fielding who said funds want long-term partnerships so that technology solutions built between the administrator, fund trustee and insurer can be more effectively integrated. “It is better for the fund to develop solutions that benefit their membership while ensuring the technology can be easily ‘plugged and played’ into both the administrators’ and insurers’ systems to transfer data.
“The last thing you want is to have your insurer build a good solution and a few years down the track you either change insurers or the new one doesn’t have the systems to capture the data,” he said. He added that Australian funds were slow to adopt some of those solutions.
With the exception of some larger funds, few have realised material benefits from their investments in digital capabilities, said Sandhu. The insurance specialist said funds were starting to invest in large member experience and engagement programs, but the translation of these programs to improvements in member outcomes is still in its infancy.
Despite the scandals and fallout following the banking royal commission, Fielding concluded that most consumers still talk to their bank because they have a reason to. “It is important to realise that both insurance and super are low-engagement products that don’t provide any near-term tangible benefits.”
In his view, product design and better technology are part of the answer but the starting point is ongoing engagement, understanding members at a granular level and then putting in place the right infrastructure and technology.
For Fielding, group insurance is the right platform for life insurance but funds have to get the technology right. The government’s focus on affordability and appropriate products will see a level of cover for members that does not always address members’ individual needs beyond default cover, he added.