The purpose of superannuation is to provide a cost-effective way for Australian workers to save for their retirement. However, not everyone is able to enjoy a full working life, so it’s vital for these people to have insurance that meets their needs and protects them and their loved ones against the risk of illness, injuries and death.
For many Australians, the only life insurance they have is through their superannuation. With $6.6 billion in claims paid through insurance in super in 2021, and 2.1 million Australians of working age (15–64 years) currently living with a disability, it’s important to ensure insurance is available, affordable, sustainable and fit for purpose.
It’s broadly accepted within the industry that there is scope to evolve the design of total and permanent disability (TPD) insurance to better support our workforce and provide more options for super fund members – including to support those with mental health conditions, for example.
This gap gives the industry an opportunity to rally together and redesign products which are more flexible and better reflect today’s working environment, said a panel of industry experts in a roundtable discussion hosted by Investment Magazine and Australia’s largest life insurer, TAL.
“When TPD was originally designed, there was a lot less focus on workplace health and safety, and it was clear what might happen to someone’s ability to keep working when they had an accident that resulted in a physical injury,” said Dan Taylor, general manager, partnerships at TAL.
“But the nature of work has evolved. People’s health, access to healthcare and medical advances have fundamentally shifted, and community expectations have changed as well.”
Making TPD insurance flex better for members
The current design of TPD presents significant opportunity to reimagine the product to increase flexibility and accommodate the changing needs of members, such as allowing early intervention and access to clinical and other support.
“There is no one size fits all for insurance in super. I do absolutely think that there’s a need for more flexibility around how you can best deliver products to suit an individual member’s circumstance,” David Evans, head of insurance at Aware Super said.
The need for flexibility is echoed in member feedback received at TAL, according to their chief claims officer Jenny Oliver. “Flexibility is the biggest thing that came back in feedback from our claims consultants,” she said. “The consultants want to be able to recognise the relationship and their understanding of the member’s needs, and then work with them to deliver valuable benefits that best help them either return to work or achieve the best life they can.”
One of the challenges in the product design of TPD is the subjectivity element of assessment which is a question of whether a member is permanently disabled or not.
“TPD is a binary product; you’re accepted or you’re not,” said TAL’s Taylor. “Mental health conditions are one example of conditions which are not binary when it comes to the claims assessment. I think that subjectivity is a real challenge to the suitability of the product given its purpose.”
Another challenge is member value, a measure of how members are paid and what access they have to support services. Industry research shows 11 per cent of income protection claimants who access rehabilitation treatment are likely to return to work.
Managing mental health conditions
In its current form, TPD leaves little scope to provide ongoing support for management of mental health conditions, which is becoming one of the largest areas of claims said Ian Lorimer, head of product & advocacy at UniSuper.
“What we’ve been using in terms of definition of TPD has now started to become dated,” he said. “Particularly for mental illness, one of the largest claim areas within TPD, it doesn’t really fit the current design of our products.”
Moreover, members are incentivised to prove they have a permanent disability, AustralianSuper’s head of insurance Richard Land said. “Members have a financial incentive to prove permanence of disability at the time of making a claim and, as such, rehabilitation to support recovery and return to work is discouraged.”
The involvement of lawyers also limits any direct engagement with a member, he said. “If [the claim] is legally represented, the rehabilitation team won’t actually be allowed to speak with the person making a claim.” Also, the prospect of financial compensation can result in secondary mental health conditions and ultimately worse health outcomes, he said.
Lump sums payments provide safety net
The participants at the roundtable agreed the lump sum benefits have a role to play, providing a financial safety net to help support members with financial distress due to lost income so they can pay for medical and rehabilitation costs.
Research by Aware Super around members’ views on the role of a lump sum benefit compared to an income replacement benefit, show members appreciated the level of comfort from a lump sum payment.
“People do see value in the safety net element and knowing there’s certainty and can plan around that for retirement,” Aware Super’s Evans said.
Research undertaken in 2015 by Sunsuper, prior to the merger with QSuper to form Australian Retirement Trust (ART), showed 22 per cent of respondents returned to work since their TPD claim payment. The data also revealed an additional 14 per cent of members, who had not worked since claim payment, were actively seeking employment.
“The research showed that permanence was no longer permanent,” Penny Pare, senior manager insurance at ART said.
“There’s absolutely a place for lump sums but many members were looking for support to retrain and for rehabilitation. Most people do want to return to work and to be able to provide for their families.”
But being able to administer any new product needs to be cost effective for members. “If we design a fantastic product, but if we can’t administer it and if our members can’t understand it, that makes it very challenging,” said ART’s Pare.
However, there are tax implications to any proposed changes to allow members to receive instalment payments instead of a lump sum. “It is difficult in a member’s best interest to go from a very tax-favoured lump sum benefit to a taxable income benefit,” said Noel Lacey, head of insurance pricing & relationship at Cbus.
“One of the big problems I have always had is trying to work out a comparable benefit on an after-tax basis because TPD receives extremely preferential concessional tax treatment,” he said.
The opportunity to reform the current system and introduce design changes to TPD needs to be an industry-wide collaborative effort.
Parties should include representation from across the industry, including super funds, the department of health, industry bodies such as the Council of Australian Life Insurers, Actuaries Institute, ASFA and AIST, regulators such as APRA and the medical and the legal industries, the panellists said.
The discussions could also involve the Productivity Commission to give the topic more economic heft and help elevate the issue to the national consciousness.
“If the Productivity Commission makes a recommendation after doing research, it’s likely to change things. This needs to be elevated from an industry issue to an economic and social reform opportunity because it involves legislative change. You have to get it up the priority list in the reform schedule because,” Deloitte Access Economics partner John O’Mahony said.
Ben Lodewijks, director at Deloitte Access Economics suggested collaboration between insurers, super fund trustees, some claimants, industry bodies and the relevant government departments to get consensus on the changes needed.
“If there is that collective agreement, it will go a lot further than something that’s purely coming from the insurers or purely coming from a trustee,” he said.
Putting members first
Products need to be simplified and language clarified. “In general, consumers find life insurance complex and confusing,” said Aware Super’s Evans.
“[Members] really want to feel engaged. It is really important that any change that we contemplate keeps that front of mind and we look at opportunities for simplification.”
The redesign of TPD needs to put the priorities of members and more broadly consumers first in order to get broad support for reform.
“If the starting point is the sustainability of insurance industry, that will end up where the last Senate inquiry ended up three to four years ago, which is people saying we’re sceptical about the motivations of the industry and we don’t know if they’re putting members first,” Deloitte’s O’Mahony said.
This view was echoed by Peter Kohlhagen, general manager, insurance division at APRA. “It is about putting the needs of the member at the centre of the design challenge here, not starting with the product, then reverse engineering it back in,” he said.
“I don’t think a consumer has a need for a TPD product or an [income protection] product. The consumer has a need for support of various types to help them get back to work or back to the best life they could have after they’ve had an adverse event. Some of that support would come from other parts of the system in which insurers operate,” he said.
The success of any product design change will ultimately be determined by members who need to use the product.
“At the end of the day, the true test of a leading, member-centric product design will be determined by members who unfortunately need to make a claim” said TAL’s Oliver.
“Giving members confidence that their insurance provides them with flexibility and certainty when they experience illness or injury – whether it’s a lump sum or an ongoing benefit and support to help them recover – must be our purpose.”