Cbus head of insurance Noel Lacey was enthusiastic in his support for the broader affects the new Your Future Your Super legislation was likely to have, but with some serious caveats.
Speaking at Investment Magazine’s group insurance summit he said post YFYS, reducing duplicate accounts was an excellent outcome and the focus on performance was “deeply welcomed”.
Those are good policy settings he maintained, as was identification and action for underperforming funds. But insurance, he warned, was at “the bottom end of the pecking order”.
Occupational exclusions
He cited occupational exclusions as being a much talked about topic but warned it wasn’t “the only issue” and there were transitional issues that needed to be addressed.
He said if occupational exclusions were removed, if the risk profile changed and if specialised areas were diluted there would be little doubt there would have to be an increase (in premiums).
“You’re going to have some of those groups which were typically in the market for a large pooled arrangement will be split over a wider number of fund bases so I think, just intuitively, until there are a smaller number of funds and scales available in those areas there has to be impacts,” he said.
He said there would be a challenge for customization for defined membership groups and he also thought automated insurance was going to be “challenged a bit” particularly for the funds that had lower new member intakes. “I think they’ll have to genuinely consider simplifying what they do now,” he said.
He maintained there were also going to be issues around entry level cover as well as communication risks and challenges.
“Will it be possible to deal with the flexibility, the options, the features, the conditions that they can be all well explained and understood or are we going to be in a position where we are winding the clock back 20 years and going back to a very simple design… and I suspect that’s genuinely a possibility,” he said.
Stapling
Deloitte partner Jenni Baxter agreed there were many positives with the YFYS legislation, but also had caveats.
One of the benefits of stapling, she said, was that it would lead to larger account balances but also to stability and that stability “in many ways (would) also extend to insurance in that members would maintain their insurance when changing jobs”.
Currently, she maintained, some people experienced an overlap or a gap when they changed funds and the cover could change quite significantly particularly with regard IP … in some cases they’d gain it, in others they may lose it.
She also warned that the new performance test would have flow on affects for insurance. Underperforming funds would be required to close to new members until such time as they could prove that they were successful.
“The obvious first thought on that is that if you’re closed to new members the insurer’s going to have to manage an aging portfolio of insured members and typically that’s not a good thing,” she said.
But she did admit that different outcomes may be possible. “We may see in that situation a greater exodus of the more engaged older members leaving the fund and the younger disengaged members stay so the insurer suddenly has this smaller younger portfolio of members to manage.”
But either way she said it may cause problems because “whenever you have big shifts in member demographics for age or occupation there’s still significant cross subsidies within the premium rates and exposes insurers to potential mispricing risks.”
As an added caveat on whether insurance should be standardised in a stapled world she said while it was fine to agree that it should be standardised, the big question was what would that standardisation look like. She estimated it would take years to agree on that.
