Major challenges are emerging to the provision of insurance within superannuation and the industry will need to evolve and become far more accountable in its offerings, industry veterans say.
Speaking in a panel discussion on ways to improve member outcomes in superannuation at Investment Magazine’s Group Insurance Dialogue, Nick Sherry, chair of TWUSUPER, said it is a good time to examine the current model of insurance in superannuation and questioned whether it should continue.
The panel also included Robbie Campo, the newly appointed chief executive of ESSSuper, and Damian Hill, chief executive of the Commonwealth Superannuation Corporation, who both argued insurance in superannuation should continue but needed to pragmatically evolve as the workforce changed.
Common law hangover
Sherry – formerly a Tasmanian senator and a founding trustee of fund HostPlus – pointed out insurance in superannuation, along with the trustee determining the beneficiary, is a remnant of the common law system that existed before the current scheme.
“It’s there by accident, it’s not there by any policy, design or debate,” Sherry said. “There was no considered debate or thought given to the complexities, the challenges, the costs, because there is a cost to insurance and quite a direct cost because of the premium cost. And there’s also a significant addition to complexity in what is the world’s most complex defined contribution system by a long way.”
No other country that has switched from a defined benefit scheme to a newer defined contribution system has included insurance in the new system, Sherry said, and this includes the United Kingdom.
Sherry said in Australia’s former system which was predominantly a direct benefit scheme, the employer paid separately for the insurance, and the system provided guaranteed retirement income as a pension or lump sum.
“So insurance in the old system, and the costs of it, didn’t reduce members’ final outcome,” Sherry said. “In a [direct contribution] system, it does.”
National scheme
Sherry said the external environment has also changed with Australia now supporting a national disability scheme, along with other relevant compensation schemes.
At TWUSUPER, it is becoming increasingly challenging to deliver cost-effective superannuation insurance for members for a range of reasons including regulatory change.
“Since I’ve been at TWUSUPER, and it’s been only two months, I sit on the claims committee, [there have been] some extraordinarily difficult and challenging individual cases that, in my view, trustees shouldn’t be determining but the law requires us to do that,” Sherry said.
Insured benefits associated with death claims had seen a “really significant reduction, and that would seem to me to indicate, at least in the case of TWUSUPER, a system that is under greater stress”.
Significant underinsurance exists within superannuation, he said, and more holes are set to open up as the number of “gig economy workers” increases.
“It is really time to have a hard look at the effective delivery of death and disability payments to all Australians in the workforce, whether they’re in superannuation or not,” Sherry said.
Safety net
Before her new role at ESSSuper, Robbie Campo worked at Industry Super Australia, helped drive policy by being a director at Women in Super and was a member of the group executive at fund CBUS which is known for its insurance offering to workers in difficult-to-insure, hazardous sectors.
Campo said she had often worked for funds with memberships that would otherwise struggle to get insurance and group insurance provides them a safety net through the benefit of pooled funds.
“It’s highly valued by ESSSuper’s members and there’s a very strong culture of managing claims processing, supporting the members of the fund and their communities at the time that they come to claim,” Campo said. “Group insurance gives Australians an equality of access to this important safety net that otherwise would not exist.”
Opt-in rates went “through the roof” when legislation under the previous Morrison government turned off insurance for inactive members.
“Cbus couldn’t retain default insurance for inactive members but they certainly voted with their feet,” she said. Through advocacy, “we were able to get a dangerous occupation exemption,” and over $25 million had been paid out by Cbus since those changes to young beneficiaries of that exemption.
Group insurance arrangements are tailored to memberships, she said, admitting that consolidation into larger and more generalised funds will challenge this.
It will be incumbent on the industry and funds to be accountable and demonstrate the insurance benefits they offer in a measurable way, Campo said. Key metrics could include the unit price of cover, the claims payout ratio, and some metrics around claims handling processes such as the length of time to payouts.
“I think they’re really good signs of the health of your cover,” Campo said. “And I do think that we need to make sure that we remain ahead of that and we don’t wait to be regulated.”
Hill said no insurer would cover the Australian Defence Force membership of his schemes. “So part of what the CSC does is act as an insurer.”
Hill, chief executive of Commonwealth Superannuation Corporation, was formerly a long term CEO of REST, worked on industry bodies that looked at group insurance and the inaugural chair of mental health foundation SuperFriend.
Hill agreed with Sherry that insurance does complicate the system but argued it should continue. “No doubt about it, the system would be far simpler without it, but I just think you’ve got to take a pragmatic view and say that the outcomes for members would be far inferior if we didn’t have it in that system,” Hill said.
REST “ended up with the largest private group insurance policy in the southern hemisphere” as a result of insuring part time and casual workers who were otherwise excluded from insurance, but “still suffering insurable events and having to rely on inadequate social security and other compensation schemes,” Hill said.
But insurance needs to continue to evolve, Hill said, pointing to the “gig economy” and growing numbers of people with side hustles and other changes to the nature of employment.
On the public sector side of CSC’s membership, 48 per cent of insurance disability claims are now in regard to mental health, Hill said, questioning whether a lump sum for total and permanent disability is the right solution for all of these cases. Product design will become more critical, along with early intervention, he said.
