As more statistics emerge about the drop in insurance in superannuation as a result of recent legislative changes, shortcomings in the regime are becoming clearer.
Super Consumers Australia has welcomed the drop in what it calls “junk” insurance – duplicate accounts which it says were unnecessarily eroding superannuation balances – but SCA director Xavier O’Halloran is calling for a review of the efficiency and effectiveness of the insurance in super system.
O’Halloran and others argue that the current arrangements around total and permanent disability and income protection insurance do not cater well to the rising incidence of mental health claims.
They argue that there should be more efficient processing of claims; more focus on structuring insurance which encourages people to recover from illness or injury, where they can, and get back to work; and a need for more standard terms of coverage which meet broader community expectations.
More work also needs to be done to assess how policies and benefits can interact with other support systems such as the National Disability Insurance Scheme (NDIS).
The increasingly urgent debate comes as Investment Magazine relaunches the longstanding Group Insurance Dialogue as the Insurance in Super Summit in Sydney on July 23, which brings together leaders in the superannuation and insurance industries to showcase both the consumer benefits of super insurance arrangements along with a raft of challenges, including claims handling and the digital experience.
‘Lacks context’
The legislative changes of 2019 required super fund trustees to stop providing insurance to new members aged under 25, or where account balances were less than $6000.
Funds were also directed to move inactive super funds to the Australian Taxation Office and cancel insurance on inactive super accounts, which had not received any contributions for at least 16 months.
The Association of Superannuation Funds of Australia (ASFA) released a paper in February pointing out that between June 2018 and June 2023 the Protecting Your Super (PYS) and Putting Members Interests First (PMIF) measures have seen a 36 per cent fall in the number of lives insured.
It argued that this led to some 5000 sets of life insurance beneficiaries missing out on potential payments of around $665 million in 2022-23.
Without the changes, it argued, another 11,000 Australians would have received some $1.5 billion a year in total and permanent disability (TPD) benefits.
O’Halloran is critical of the ASFA report, which he says “lacks context” and “fails to explain that these measures helped people reduce the number of costly duplicate and inactive accounts they had”.
“While the number of ‘lives insured’ decreased, this was largely because people were unintentionally paying for two, three or more sets of cover,” he tells Investment Magazine.
The number of duplicate insurance accounts in Australia, he says, has dropped from 10 million in 2018 to four million in 2023.
The 2019 Productivity Commission report on super argued that duplicate accounts were eroding members’ super balances by $2.6 billion in unnecessary fees and insurance, with balances being eroded, often by more than $50,000, by duplicate policies.
While the changes have helped to reduce unnecessary duplication of accounts, fees and insurance, O’Halloran argues that an inquiry is needed to address emerging shortcomings of the current system of insurance in super.
He argues that the current system is “poorly designed” and has “led to set and forget policies with unfair cross-subsidisation, and is littered with restrictive definitions the average person has no hope of understanding”.
“It provides poor protection for people who are out of paid employment, work part time, are casual, are attempting to make a mental health claim or have no or limited super,” he says.
“The system is far too complicated for any one person to navigate.
“The gaps outlined above and the overlaps with schemes like workers compensation, the NDIS, disability support and insurance outside of super have left people either over or under protected.”
Mental health claims in spotlight
O’Halloran says a review of the system should:
- Consider how best to provide assistance to people in the event of illness and injury, including whether opt-out insurance through superannuation is the most efficient and equitable way to do so;
- If more prescriptive regulation is required (e.g. universal terms) to ensure insurance in superannuation aligns with community expectations;
- Look at the intersection of insurance in super with other schemes (such as workers’ compensation, NDIS, employee entitlements, disability support pension and insurance outside of super);
- Examine the costs and benefits of retaining current insurance arrangements on an opt-out (as opposed to an opt-in) basis; and
- Consider international examples of how best to financially protect people if they can no longer work due to death or disability.
One area of agreement is the concern about the implications of the rising incidence of mental health claims.
The ASFA paper pointed out the significant increase in TPD claims in recent years (from 15,969 finalised claims in the year to June 2018 to 18,410 claims in the year to June 2023), particularly those associated with mental health issues which it says has led to a “marked increase” in premiums.
It pointed out that under the current system, claims for TPD or disability income insurance (DDI) often require medical reports and assessments to be made.
This has led to many claims taking more than six months to process, and 6 per cent taking more than a year to be processed by insurers.
Deloitte partner Jenni Baxter says while the reduction in insurance levels in super as a result of the 2019 legislative changes was expected, the super and insurance industry is “increasingly advocating for change to the legislated insurance benefits allowable within super”.
“The current restrictions and the TPD-style benefit do not meet members’ needs in the best way,” she tells Investment Magazine.
“The TPD design is especially poorly matched to mental health claims which we are seeing continue to rise. “
“The average payout for insurance in super for TPD also only equates to around two years’ salary, so it’s really more of a payment for early medical costs, immediate expenses and a financial bridge to a new lifestyle.”
“The current design however does not lend itself to quick payments, and the benefit often comes too late to support people with these critical needs.”
The safety net
Despite the reduction in the number of policies, Baxter points out that insurance in super is still the single most important system of coverage for many Australians when it comes to life insurance, TPD and income protection insurance.
“Underinsurance remains a significant issue for the Australian population of working age and default insurance in super does the absolute heavy lifting here as it is the main source of insurance people have in place.”
“So, it’s paramount we get the design and scale of this insurance optimised,” she says.
The ASFA paper also showed that insurance coverage distributed on an individual basis outside of superannuation has also contracted – a factor it attributes in part to the declining number of qualified financial advisers in Australia.
The current system, says ASFA chief executive, Mary Delahunty, means many people have default cover through superannuation without having actively chosen it while younger members or people with super balances below $6000 or those with an inactive account may not have any coverage, despite their needs.
She says the system now puts more pressure on individual members to be more aware of their insurance needs and what their super fund offers.
“People now have to be more conscious of their insurance and take proactive steps (where appropriate to their needs) when they have no or default insurance cover or where their insurance cover is lower than what they need,” she tells Investment Magazine.
For their part, she says, insurance companies are also “actively examining how they can make their products even more relevant and visible to consumers.”
“Better engagement with consumers can lead to higher take-up of insurance.”
Delahunty argues that super funds may find it easier to start engaging with their members in regard to insurance once proposed changes to the regulation of financial advice come into effect.
“This could include funds providing nudges or targeted advertising of group insurance based on known characteristics of fund members, such as age or a new nomination of a spouse as a beneficiary,” she says.
The Investment Magazine Insurance in Super Summit will be held at InterContinental Sydney Double Bay on 23 July.
