TPD — Broken or just damaged

Problems with total and permanent disablement (TPD) insurance have seen Australia's major group insurers take a serious hit to their bottom lines. A Super Review roundtable asked what had gone wrong and how it could be fixed, this is part one.

Mike Taylor, managing editor, Super Review: Welcome to the TAL/ Super Review roundtable and as you all know, the topic today is total and permanent disablement insurance. And I think we all know that there are problems which have shown up on balance sheets and elsewhere. So I think I'll start off with a question which I've already flagged to Brett somewhat, which is what do we believe is the root cause of the problems which have beset TPD and similar types of insurances? And I thought I'd actually kick off with Russell Mason.

Russell Mason, partner, Deloitte: I think there are a number of factors combining to cause the problem. I think it went through a phase where it was almost too easy to get TPD, I think the definition was at times loosely interpreted. I think the legal profession have jumped on a bandwagon, certain members of the legal profession in TPD claims.

I think consumers, as they should be, are more aware of their rights when it comes to insurance and entitlements from the super fund, and I think the pricing was probably too low from a sustainability point of view, so I think all those things combined to produce the crisis of a couple of years ago and now the industry is working together to see how we can come back with a more sustainable product that serves its true purpose and gives those members who are entitled to it the types of benefits they deserve.

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Jocelyn Furlan, consultant: I think I would add to that to say that I think that some of the problems have been caused by the fact that there's a very long tail. People are coming out of the woodwork six, seven years after the disabling event and claiming a disability benefit and I think that makes it really hard for pricing and I think it makes it really hard for the cost of actually administering TPD claims.

I think it [TPD] was used also as a brand differentiator for funds and so there was a mad scramble to offer the best automatic acceptance total and permanent disability.

One of the unintended consequences of that was when, as people moved from industry and retail funds, regulated funds, into self-managed super funds, they left a little bit behind to maintain their insurance. So I think there's been a lot of activity around not being a member of the fund for any other purpose other than to maintain the insurance because it was so cost effective.

Brett Clark, chief executive, TAL: If we're defining the problem as the cost of claims having exceeded the pricing, if it's a problem for insurers and their balance sheets and so forth, then in a pure sense only one of three things could have gone wrong. One is that the pricing was too low or the claims were higher than the pricing or a combination of the two, and I think the answer's a combination of the two.

The market, if you look back three to four years ago, before we encountered some of these difficulties, was very competitive and pricing was sharp, and so ultimately I think pricing got to a point where it was too low in comparison to where we should have reasonably expected claims to be. I think it's also true that we have seen more claims than we probably reasonably expected there could be, and that comes about through a range of different circumstances. But primarily I think for me it's about members being more aware and consumers being more aware of insurance inside their superannuation fund and the value that it can provide to them in difficult times. If we reflect through some difficult times of a year or two ago, ultimately that's a good thing, if people are seeing value in the disability benefits that their superannuation funds provide, disability benefits for life insurers is a very important service we provide, and that should continue. But it needs to continue in a sustainable way.

So why are claims higher? Increasing member awareness, those sorts of things, very good. I think there's an element of the legal profession supporting that awareness. Ultimately if members get paid claims that they were entitled to, that is fair enough and a good thing also but ultimately the prices will need to reflect the underlying claims experience.

MT: Angie, you're running a super fund. How hard has it been?

Angie Mastrippolito, chief executive, NESS Super: Well we've actually had good experience so we're sort of trending the marketplace a bit. I think a lot of the problems in the TPD market are to do with benefit design and the designs that trustees have put in place that have actually caused a lot of selection against their funds. You make the honeypot very big, the bees come running, and I think the honeypot's got too big and it's allowed people to access the honeypot who shouldn't have been accessing the honeypot and I think that's an issue with the claims experience. I think we need to get a lot tighter in the way we design our superannuation offerings.

Geoff McRae, actuary, Rice Warner: Yes, I'd agree with Angie. Certainty the policy terms, benefit design, whatever you like to call it, and the loosening off of terms at the same time as the price was going down, the combination of those two. And I think that's been helped along by some of the advisers looking for places where they can conveniently place hard to place risks and they've realised even though they don't earn any commission on these that they can have some very happy clients, and certainly some of those have taken advantage of very easy cover that's been available in some super funds.

MT: John, I've got to say, lawyers are getting a share of the blame here.

John Berrill, lawyer: A shellacking.

MT: Well I don't know about a shellacking, they haven't opened up yet.

GM: We have to warm up first.

MT: What's your view?

JB: Everything's multifaceted isn't it? The main drivers I think are consumer awareness has increased, that's partly because of lawyers. But you can add to that financial counsellors, financial advisers, who are bringing lots of claims these days on behalf of people. Community groups are more aware of it, and as people's account balances increase, so does their interest in what's in their fund and what's in the statements they get every year. That's one thing but I think the primary cause has been the competition introduced by choice post-2005.

What we saw in the late 2000s and early 2010s is exactly what we saw with income protection in the retail market in the early ‘90s, which was a feeding frenzy and a big competition for market share, and there are numerous examples of where the insurance offerings for death and TPD and income protection post the introduction of choice increased dramatically without any significant increase in premium. And what you're seeing now is the claims that are being made now or being paid now are the claims for people who've had this significant increase in insurance offering with no matching increase in premium that occurred post the introduction of choice.