Momentum is growing for a government-backed inquiry into the sustainability of insurance in superannuation, with financial services minister Jane Hume and her labor counterpart, Stephen Jones, calling for action to make sure the sector is fit for purpose and valued by members.

The agreeance fell short of bipartisan support, with each sharing different views at the Conexus Financial Digital Chair Forum on the appropriate means of addressing the issues plaguing the industry, but a common theme did emerge: group insurance doesn’t work in its current form.

Hume, the sitting minister for superannuation, financial services and financial technology, said the government is aware there is a problem with group insurance in super, particularly with regards to total and permanent disability insurance.

Commercial issues are making group insurance “increasingly unviable,” Hume said, before adding that the productivity commission’s 2018 suggestion that a governmental inquiry into insurance within superannuation was “worth consideration”.

“I think there’s some merit in that,” Hume continued. “We want to make sure that the insurance that is in superannuation is fit for purpose – we know it serves a good purpose but it has to be fit for purpose as well.”

As a result of its inquiry into superannuation, the productivity commission recommended a review be undertaken before the end of 2022 to “evaluate the effectiveness of initiatives” in group insurance. Foremost among these initiatives would be the reforms to default insurance arrangements brought in as part of the 2018 Protecting Your Super reforms, including making insurance opt-in for under 25s, accounts under $6000 and accounts with no super contributions for 13 months.

The reforms, which started in mid-2019, also capped administration fees and banned most exit fees.

Jane Hume

Hume herself had a major hand in the Bill’s passing, chairing the Senate Economics Legislative Committee that was charged with reviewing and reporting on the changes.

That committee largely endorsed the reform agenda, backed by 34 submissions from industry participants that supported the Bill’s purpose – to “improve Australians’ retirement savings by protecting low-balance accounts from undue erosion due to excessive fees and inappropriate insurance arrangements”.

Submissions to the review warned of the commercial impacts risks Hume alludes to, with Mercer noting that “increases in premium rates and changes to automatic acceptance terms are highly likely as a result of greater anti-selection, more underwriting costs and spreading of fixed costs over a smaller premium base”.

The Australian Government Actuary reported to Treasury that those impacts would amount to an increase in insurance premiums of “7 to 10 per cent”, while KPMG put the figure at “26 per cent overall” and Rice Warner, in a report commissioned by insurer AIA Australia, modelled a 15 per cent increase coupled with an average improvement in individuals’ retirement balance of 0.27 per cent.

While acknowledging the upward pressure on premiums the reforms would bring, then-deputy chair of APRA, Helen Rowell, said the precise impact was “difficult to assess”.

A few years later that impact is becoming much clearer. In June 2020 KPMG said losses on life insurance products grew by $1 billion in the preceding 18 months, with KPMG’s insurance lead partner David Kells noting that this was off an already-low base.

“This was always likely to be a tough 12 months for the life industry… with the full effect of regulatory changes kicking in this year,” Kell said. “Profits have fallen, or losses worsened, on almost every metric and then two-thirds through the financial year, the COVID-19 crisis started,” he said, adding that the burgeoning mental health crisis was an “additional significant challenge”.

Industry to state its case

The shadow minister for financial services, Stephen Jones, argued that the entire life insurance industry was at a crucial juncture and required immediate attention.

“I think there is an in existential issue surrounding life insurance as a product,” he said. “Both the way it’s sold at a retail level and the way how provided through wholesale clients such as superannuation funds.”

Stephen Jones

Where Hume took a more pragmatic route in calling for a review of the sector, Jones put the onus for change squarely back on the shoulders of industry.

“Personally, I’m of the view that one of the most value for money ways of obtaining super is through your superannuation fund and all the studies that I’ve seen have borne that out,” he said. “But I think the industry has a challenge itself for it to re-prosecute the case for why it is an essential product in peoples’ weekly budget.”

Ultimately, the shadow minister argued, commercial viability assessments should be the responsibility of commercial stakeholders at the front end.

“That’s a job for the industry, not a job for the government to do,” he said.

Tahn Sharpe is a Sydney-based financial services journalist with a background in financial planning. He writes on advice, superannuation, investment, banking and insurance issues, is a certified SMSF Adviser and holds an Advanced Diploma of Financial Planning.
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