The insurance industry should prepare for a likely government inquiry into insurance within superannuation, experts say, but it is crucial this review looks at maximising its societal benefits rather than beginning with the question of whether it is needed at all.
In the years before and after it became law in 1992, insurance inside superannuation has played a critical role in providing a safety net and helping fund members achieve their retirement goals, according to Anthony Clough, General Manager, Group Distribution at AIA Australia.
But with ongoing changes in legislation and consumer expectations, the industry needs to step up to the challenge of ensuring its products are clearly providing value back to fund members, Clough said in a panel discussion with superannuation industry veteran Tim Jenkins, partner and superannuation advisor at Mercer Investment Consulting.
The discussion was hosted by Investment Magazine, in partnership with AIA Australia, as part of its Future of Super podcast series.
“We do believe that insurance needs to be reimagined to be fit for super,” Clough said. “If you think about sustainability, suitability and affordability, they are all key metrics that insurance inside super should be meeting, and I think we all need to make sure that we are evolving our products so they provide members with the outcomes they are expecting.”
Higher automatic acceptance limits and a gradual increase in levels of cover over time have increased premiums and their impact on retirement savings, Clough said. The industry also faces the difficult issue of pricing for changing expectations towards cover, notably Total and Permanent Disablement (TPD) and a rise in mental health claims. There is evidence that up to a third of TPD claimants are ultimately returning to work, calling into question if the definition is correct.
The impacts of recent legislative changes–like Putting Members’ Interests First and Protecting Your Super–have not had time to “fully develop across the system” before the introduction of ‘stapling’ reforms aimed at preventing account duplication, said Clough.
Clough said he was concerned new superannuation fund performance comparison tables could be “seen as a de facto guide for members, or a piece of advice from the government around…how an individual should be looking to select a superannuation fund”, regardless of whether a fund’s insurance offering is suited to the member.
Tim Jenkins said consumers couldn’t be expected to value and engage more with their fund’s insurance offering after recent legislative changes.
“The performance test has a fail notice encouraging people to move products that doesn’t consider insurance or even mention Insurance, [and] The ATOs Your Super comparison tool only looks at fees and past performance,” Jenkins said. “How can you expect consumers to value insurance in super, when the legislation so downplays its role?”
Stapling reforms may create as many problems as they fix, said Jenkins, potentially raising costs and leading to fewer funds with less competition and innovation in the sector.
A major flaw in the Your Future, Your Super legislation is the complete absence of recognition for the role employers play in superannuation above simply paying contributions, he said.
“We’ve got 30-plus years of employer superannuation, yet the Productivity Commission review ignored their role, where larger employers have secured better and tailored arrangements for their staff, particularly in relation to insurance–which raises the bar for all funds, and benefits all individuals,” Jenkins said.
“I think actually there’s a real possibility all the changes here lead to commodity MySuper: look-alike arrangements, look-alike insurance…probably likely to be more expensive…than at present,
also with lower cover, because in that world it’s brand and direct marketing that win,” Jenkins said.
This could lead to the re-emergence of larger employers and multi-nationals re-introducing their own company-owned insurance policies, he said, possibly combined with a wellness package.
AIA Australia’s Anthony Clough will be a featured speaker at the second part of Investment Magazine’s Group Insurance Summit in October – please register here to attend the digital live stream.