Insurance is often neglected in early merger negotiations and plans according to industry figures, and this can cause unexpected risk and complexity for months or even years following the merger’s completion.
In a roundtable focused primarily on superannuation fund mergers and the impact on insurance, Darren Wickham, head of group insurance for Zurich’s Life & Investments business in Australia, said he had been involved with more than 20 different mergers, and “insurance is never the key feature of a merger until the end when it becomes a problem”.
Speaking at the virtual roundtable sponsored by Zurich and hosted by Conexus Financial, titled Rethinking insurance in super, key industry figures discussed the complex group life insurance landscape and how funds are responding to an unprecedented amount of change and new regulations in recent years.
Industry behemoth AustralianSuper completed a merger with Club Plus Super in December 2021, with another merger with LUCRF Super due to be completed in mid-2022. Managing the differences between premiums as well as terms and conditions was a key challenge, said Richard Land, head of insurance product and pricing at AustralianSuper.
“It is crucial to keep in mind the best financial interests of members of both funds,” he said.
When premiums of the incoming fund are higher, the increase in economies of scale that is brought about by a merger, and the long-term reductions in fees this brings to the broader membership, can justify subsidising a reduction in the premiums of the incoming fund, Land added.
“Generally, the economy of scale outweighed any differences in premiums. And to be honest, I was surprised that it did actually work quite readily,” Land said.
Chair Stewart Hawkins, editor of Investment Magazine, asked whether it would be acceptable to raise premiums for the incoming fund members if they were to be receiving a better insurance product.
This was the case with Club Plus where AustralianSuper’s premium rates for some member cohorts were indeed higher, Land said. Comparing like for like can be challenging, he said, and the AustralianSuper team conducted an involved comparison of fees and products before proceeding.
Typically, AustralianSuper had “very, very willing merger partners”, Land said, willing to take a “holistic approach” to the SFT rather than going through it “line by line”. Winning a tender for a retail fund would be much more line-by-line, he added.
The grandfathering approach
Other funds have taken the approach of ‘grandfathering’ insurance arrangements of the incoming fund, planning to consolidate them after the merger is completed and the dust had settled.
Hostplus has been involved with a string of mergers in recent years, bringing in Club Super, InTrust Super, and shortly Statewide Super. Maritime Super and Hostplus are set to merge sometime next year.
The death and TPD benefits of Club Super were similar to those of Hostplus, and so were relatively easily shifted into the Hostplus arrangement, said Shane Fielding, head of insurance at Hostplus. But those of InTrust and Statewide were significantly different, and switching to Hostplus’ insurance design would have seen premiums double for large cohorts from those funds.
In response, Hostplus has grandfathered insurance from the successor fund transfer date. An upcoming major product review will seek to create a single Hostplus insurance design that is suitable to consolidate these arrangements in the future. In the meantime, the fund is managing the increased risk of multiple insurance arrangements.
“Having a grandfather arrangement introduces a significant level of additional risk into the business,” Fielding said. “You’ve got five or six different TPD definitions that a claims team’s got to be managing. You’re dealing with seven or eight different insurers and different processes. And whilst MetLife is our main insurer, we’ve got relationships now with probably every other insurance in the market just because of the merged entities that we’ve brought on board.”
Despite the added risk and complexity, saving the insurance conversation for later seemed the best approach as Hostplus already had a significant task bringing two of those funds off their self-administered platforms into the Hostplus Link platform.
And although ironing out the details was left for later, it was important that guiding principles around how the insurance transition will occur have been put in place early, said Fielding.
Michael Rooney, head of insurance at CareSuper, said he had been through mergers that carved out insurance to be dealt with after the successor fund transfer, as well as mergers that immediately integrated the incoming fund’s insurance. In hindsight, the grandfathering approach had worked better, he said.
The advantage of waiting until after the transfer was that his fund had a period of time to better understand the history, occupations and key issues of importance for the incoming fund’s membership. This made it easier to design a new arrangement suited to all members, rather than trying to force one membership base into another, and ultimately led to a better outcome.
“So when we merged we had better information than trying to squeeze them into something on day one,” Rooney said.
His fund “did struggle more” with the merger that immediately integrated insurance, he said, as members faced a sudden change to their premium or the design of their insurance cover.
Other participants felt insurance transitions were better managed upfront.
Christopher McManamon, chief service delivery officer for NGS Super, said NGS had a long history going back more than 30 years with a lot of mergers along the way. Grandfathering had been a feature of several mergers, along with the “risk and the very real cost of servicing and maintaining it, and also honouring it when the times comes, and getting it right”.
The complexity this approach brings is, in 2022, “in conflict with the general view of pretty much everyone everywhere, which is about simplicity and ease and removing complexity,” McManamon said.
In the case of grandfathering and honouring commitments made years prior by the merging fund, “communicating it on a member statement when the fields for that member statement don’t naturally fit the offer, you know, that’s where the rubber really hits the road,” he said.
While HESTA Super, the industry fund for people in health and community services, has not been particularly involved with mergers to date, looking forward, insurance should be an early consideration to de-risk in parallel with other processes looked at, said Jorden Lam, the fund’s general manager of member services and operations.
“The intuition is actually saying, bring it forward,” Lam said. “Sometimes I do think we need to consider that longer term cost implication of grandfathering and weigh it up against the upfront work of doing product redesign.”
Key issues to consider
As the pace of industry consolidation continues to increase, participants pointed to a range of insurance-related issues that will become more prominent.
Fielding said it wasn’t just members of incoming funds that faced changes to their insurance premiums and details. A large number of incoming members could ultimately change the demographic mix of the main fund, leading to price changes for the majority of members.
Lam said ensuring products are like-for-like can be challenging when a fund with insurance products focused on a particular industry is merging into a larger and more industry-agnostic fund. HESTA’s default insurance protection cover is unique to the fund’s design, Lam said, and if another fund of interest doesn’t have a default insurance protection, much consideration will go into considering equivalency and the best financial interests of the new membership.
Occupational issues will be key for bigger funds with a wide spectrum of members, Rooney said, as they look to have a default cover for the lowest common denominator. “If it’s a lot of white collars and a few blue collars in there, then the white collars are going to be paying for blue collars on that general default arrangement,” Rooney said.
Stapling legislation will create difficulties when members stapled to a fund change to a more hazardous occupation without notifying their fund, Wickham said, leading to inadequate insurance cover and potentially even exclusions for the occupation they are now in.
“The insurance industry has said it is committed to making sure that as much as we can, we remove those exclusions and we ensure that members have cover even if they go into one of those hazardous occupations,” Wickham said. “But the flip side of that [is] we often don’t know when somebody changes to a job that is considered hazardous.”
The importance of good data
Obtaining better data remains a key issue that funds expect to be grappling with for many years to come. Wickham said it would help if the Australian Taxation Office agreed to share occupation details with funds to allow them to better understand and categorise their members. The ATO has this data, and it could be shared through the SuperStream portal with “just a flick of a switch”.
Rooney agreed. “One of the major issues with insurance is everyone keeps telling us we need to know our members better, we need to get better data, we need to know more about them, and yet for each SuperStream [account], nothing that they give except for date of birth actually helps us with anything about insurance.”
The sharing of gender, occupation and salary should be made compulsory, he said. “There’s a clear conflict between what the regulator wants us to do and what their own rules require employers to give us.”
But Land said: “the reality is that the ATO is not going to pass it on no matter how much we do,” and funds need to step up to the challenge at getting more adept at data collection through other means.
Stapling legislation may have made some aspects of data gathering easier, Rooney said, because “generally members are going to join your fund through choice, if they are moving”. While funds will still get new members coming through first employers who typically give minimal information, with Choice members there is a unique opportunity to “start better interacting and getting that information”.
Rooney said funds “actually know a lot more than we think we know,” but are not good at reading the data. When compulsory super guarantee contributions change, this is often due to changing employers, he said. When contributions come from two employers, this means the member has two jobs. The industry needs to get better at picking up these markers, he said, and approaching these members about changing their insurance arrangements.
There is an opportunity to approach data collection at an industry level, McManamon said. “We can’t have all the different funds approaching it differently and asking employers and members for different things in different ways. It’s inefficient, and we’re not going to get consistent data to really inform those effective decisions like product design and character of our membership.”
Land said providing more tailored insurance is the next big challenge. Group insurance began as a “very, very broad brush” offering, but this is “no longer good enough” as members become more engaged.
Rising to the challenge will involve engaging members and allowing them to tailor insurance to their needs, giving them access to registered financial planners if they need it. Benefit designs also need constant improvement, so they are “tailored a little bit more to individual needs rather than just, say, a flat dollar…amount”.
The challenge of mental illness
Wickham said a decade ago only around eight per cent of TPD claims were mental illness related, and now it is closer to 25 per cent. A further uptick in mental illness claims is taking place since the advent of Covid-19.
There are only 3,600 psychiatrists in Australia, while every year the insurance industry has at least 20,000 mental illness claims. A lot of people don’t have insurance that covers seeing a psychiatrist.
“So somebody described it as getting good mental health care is like hunting a unicorn,” Wickham said, and addressing this will be a major challenge for insurers and funds in the years to come.
Some regulatory change will be needed to allow more innovative solutions to mental illness from insurers, said Fielding. TPD for someone with severe depression is probably not the right benefit for them, he said, but the structure of disability payments in superannuation doesn’t allow funds to innovate to better support members.
“With the right support structures in place, they probably can get back to some work at a later date,” Fielding said. “So [with a TPD benefit] the fund pays out the lump sum benefit and says ‘farewell, on your way, look after yourself,’ and then there’s no longer an opportunity for the fund to support that member.”