Covid-19’s impact on the superannuation industry has been broad-based.
Its king hit to investment markets, employment and superannuation balances is being compounded by the regulatory and social pressures driving up group insurance premiums. This has led to members having insurance premium increases as high as 50 per cent in extreme cases.
Taking into account that those pressures are set to rise further, due to increasing mental health claims and the continuing economic and social impacts of Covid-19, some are questioning how trustees’ can feasibly offer meaningful benefits given that premium levels for default cover are restricted to a maximum of one per cent of salary.
Sean Williamson (pictured), chief group insurance officer at MLC Life Insurance, says the impact on superannuation funds goes beyond the profit pressure on funds’ investments in the business world and the uncertain economic growth outlook. A high volume of regulatory change is also working its way through the system.
The federal government’s Protecting Your Super and Putting Members’ Interest First packages have affected premium levels and the administration costs of insurance.
“Probably the biggest area where superannuation funds are feeling a lot of pressure is managing the high volume of regulatory change and understanding and adapting to community expectations, as defined by regulators,” Williamson says.
“Some funds have expressed that they’re struggling to focus on business and strategy because of the burden of dealing with so much regulatory change, and the level of compliance and risk management that’s expected. So there’s a lot of time and monetary investment committed to that.”
Putting Members Interests First legislation, which came into effect on 1 April this year, means members with balances under $6000 now need to take action to keep their insurance. For new members, it means that automatic insurance cannot start until they reach age 25 and have a $6,000 account balance – which creates potential gaps in members’ ability to get cover.
The Australian Financial Complaints Authority in August confirmed there had been an increase in complaints over large premium increases in insurance inside superannuation. AFCA pointed to the government’s Protecting Your Super changes and Putting Members’ Interests First regulatory changes as part of the cause. Both decreased the number of people with insurance in their super, which decreases the number of members available for spreading risk and expense costs.
Rising unemployment will also have a multi-pronged impact, Williamson says. The early release scheme resulted in many nil superannuation balances, reducing the number of members with insurance coverage.
“There’s no doubt we will hear about individuals who have taken funds out and lost insurance cover and some event has occurred where they haven’t been able to claim on that,” Williamson says.
In other cases, members may have cancelled their insurance due to premium increases that occurred before Covid-19 arrived.
In August, consultancy Rice Warner found superannuation insurance premiums for death and TPD had increased by an average of 16 per cent since January. Members with income protection had seen premiums rise an average 28 per cent, and some funds exceeded 50 per cent.
Rice Warner also advised that, while the uneven impact of Covid-19 on sectors and geographic areas would cause premium increases to vary by fund, group insurance was still better value than individual insurance due to pooling risk and efficient distribution.
Income protection and mental illness
Williamson points out that claims related to Covid-19’s economic and social impact are likely to surge in the coming months. This is in spite of the number of claims directly related to infection with Covid-19 being minimal, thanks to Australia’s relatively effective containment of the virus.
“Covid-19’s recessionary impact has driven up the unemployment rate and many estimates predict will increase further,” explains Williamson. “Based on historical experience this will result in additional income protection claims for insurers. In particular the social isolation and Covid-19’s widely felt impact on mental wellbeing will lead to higher mental health claims in the short- and medium-term, which tend to be of longer duration than other types of claims.
Over the last few years, the majority of funds have increased their premium rates, and generally that’s been double digit increases.
“All of this creates challenges for funds in how they administer their group insurance,” says Williamson. “The cost of insurance is likely to rise further and trustees will be balancing whether to increase their premiums again or decrease their level of default cover. Funds really have to re-assess what’s an affordable design and insurance arrangement for their membership.”
Balancing insurance offerings with affordability
The Insurance in Superannuation Voluntary Code of Practice came into effect in July 2018 as a measure to provide clearer accountability and consistency of delivery and build confidence in life insurance in superannuation.
Owned by the Association of Superannuation Funds of Australia, the Australian Institute of Superannuation Trustees and the Financial Services Council, the code limits the cost of default insurance cover to one per cent of salary to prevent excessive eroding of retirement benefits for members.
“From an insurers perspective, the one per cent limit is a very blunt tool. It is highly restrictive for ensuring benefits are appropriate across the membership, especially for some older members who need appropriate insurance transitioning into retirement,” he explains.
Trustees and insurers are left with limited options to meet the arbitrary cap. This usually leads to a reduction or removal of cover, especially in Income Protection. This is a far from optimal outcome says Williamson.
“Income Protection is an important benefit which is effective in assisting members during temporary illness or injury and supports their return to work.’ Williamson adds that “the health benefits of work are well understood. Returning to work keeps people healthy, while also ensuring that members keep contributing to their super so they can live their best,” he says.
Even at public events such as the Investment Magazine’s Group Insurance Summit, it is admitted that while the voluntary code’s one per cent of salary affordability threshold is a helpful stake in the ground, funds offering default income protection insurance will struggle to meet it.
The future of group insurance
In the months and years to come, funds will need to take a hard look at their insurance philosophy, particularly around disability benefits, predicts Williamson. “For example, should Total and Permanent Disability be a benefit paid only if an individual can never work again, or should it be paid in instalments with the expectation that some members may ultimately return to work? How should TPD operate in conjunction with Income Protection?”
The role of voluntary cover is increasing, Williamson says, and may play a more significant role in a funds’ future insurance strategy. “Some funds will build their data capabilities to deliver insights into member behavior” he says. ”This would allow members to engage digitally to manage and potentially increase their insurance cover.
It could be achieved in conjunction with a suite of other services such as providing advice around health and wellness, the ability of individuals to get a second medical opinion, and other pre-claims and post-claims services.”
Williamson points out that each fund is unique and ultimately has to be clear on their insurance philosophy, understand their objectives with TPD and income protection, overlay affordability on top of it, and look at the pros and cons of each benefit from both an operational point of view and a customer point of view.