How PMIF and PYS contributed to higher group premiums

In the approximately two years since the Government introduced its Protecting Your Super (PYS) legislation and its allied Putting Members Interests First (PMIF) the number of people covered by insurance inside superannuation has declined while premiums have risen.

Given that one of the key objectives of PYS and PMIF was to reduce account balance erosion by effectively making insurance inside superannuation opt-in for younger and low income members the outcome, at this stage, appears to have fallen significant short of what the Government had hoped for.

As a reminder, the PMIF legislation provided for the cancellation of insurance cover for members with balances below $6,000 (where they didn’t request to keep the cover) from 1 April, 2020, and only start insurance cover for members where they have reached a balance of $6,000 and are age 25 or older.

So, what has the bottom line been?

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According to data compiled by specialist life insurance research house, Dexx&r, total in-force premiums for group life are down 3.2%. They stood at $6.226 billion at December 2018 and at December 2020 stood at just $6.013 billion.

What is more, the data show that premium charged to members for default cover death and total and permanent disability (TPD) have increased by 15% since January 2018 with Dexx&r’s Mark Kachor making the point that if premiums charged to members had not been increased by 15% over the past two years, the decline of in-force premiums would have been around 18%.

This is telling because it remains generally acknowledged that insurance inside superannuation remains the most common form of life insurance cover carried by Australians and the phenomenon of the PMIF legislation coming at a significant cost to superannuation fund members remaining in the insurance pool was predicted well before 2019.

But the Government’s legislative efforts have not been the only driver for increased premiums in the superannuation arena, with the insurers themselves having broadly sought to reshape what represented chronically unprofitable disability insurance offerings.

This much has been recognised by the Australian Prudential Regulation Authority (APRA) which has expressed long-term concerns about the profitability of disability insurance and as recently as March saw fit to write to superannuation fund licensees and the chief executives of the major life insurers warning about the re-emergence of bad practices.

What APRA said it was worried about was premium volatility and the re-emergence of tendering practices which put price above service with respect to group insurance mandates.

In short, APRA’s letter suggested that there was a danger that insurers and superannuation funds could repeat the mistakes which gave rise to the significant losses which occurred between 2012 and 2016.

Under the heading “Key areas of concern” APRA’s letter stated:

“Following a period of significant premium reductions and benefit increases for life insurance provided through superannuation, between 2012 and 2016 insurers experienced significant losses. As a result, there were large premium increases, more restrictive cover terms were introduced, and a number of trustees experienced difficulty in obtaining quotes for cover for their members as insurers and reinsurers declined to participate in many tenders. The significant changes in premiums (as a result of premium reductions followed relatively quickly by large increases) was a poor outcome for members.”

“The trends and practices which APRA has observed recently appear similar to those seen in 2012-2016, and have similarly been accompanied by a deterioration in group life insurance claims experience and significant impact on life insurer profitability.

“APRA is concerned that, should these trends continue, members are likely to be adversely impacted through further substantial increases in insurance premiums and/or a reduction in the value and quality of life insurance in superannuation. Indeed, the ongoing viability and availability of life insurance through superannuation may be at risk, adversely impacting access to life insurance cover for a large part of the Australian community.”

Dealing with premium volatility, the letter said that the deterioration in life insurance claims experience within superannuation, and consequent unprecedented losses for insurers, recent APRA data illustrates that insurance premiums per insured member have been escalating during 2020.

“APRA has also observed that material premium increases by insurers have contributed to RSE [registrable superannuation entities] licensees tendering insurance arrangements more frequently. APRA is concerned that, in some cases, the pricing on which tenders are being won by insurers, whilst initially attractive to RSE licensees, may prove to be unsustainable, and therefore likely to lead to significant increases in premiums at the end of premium guarantee or contractual periods.

“Such price volatility was observed in 2012-2016, following the losses in the group insurance market at that time. Ultimately, members are not best served by such unpredictability and volatility in insurance premiums, with members paying more in future for insurance as a result of unsustainable prices being offered to win tenders in a prior period. This volatility makes it more difficult for members to assess insurance costs and the value of the insurance.”

Hardly surprisingly, APRA ended on the note that it expected life insurers and superannuation funds to “take steps to ensure that insurance offerings and benefits are sustainably designed and priced, provide appropriate value for members, and adequately reflect the underlying risk and expected experience”.

Deloitte superannuation partner, Russell Mason said that there was no question that insurance inside superannuation had gone through a problematic period but he continued to believe that group life insurance represented one of the key benefits which could be delivered by superannuation funds.

He said he was therefore concerned when he heard suggestions from some quarters that insurance inside superannuation should be entirely opt-in.

“If that were to happen then I believe that tens of thousands of superannuation fund members could find themselves at substantial financial risk,” he said.

The implications of making group insurance opt-in for superannuation fund members has also not been lost on specialist actuarial consultancy, Rice Warner, which earlier this year published an analysis noting that the Australian Securities and Investments Commission (ASIC) had estimated that almost 10 million superannuation accounts currently had insurance attached, of which 86% had insurance on default settings.

It was in these circumstances that Rice Warner was exhorting superannuation funds to become more familiar with insurance data.

“The introduction of PYS and PMIF legislation has for many members changed their insurance status and introduced new complex rules for switching cover on and off. This has heightened the risk and prevalence of administrative errors which are notoriously difficult to successfully unwind.”