Insurance - the only certainty is change

As the Government implements its Stronger Super policy and in particular MySuper, superannuation trustees are reviewing their insurance offerings. As Damon Taylor reports, the impact is already being felt among the major insurers.

As the Australian superannuation industry embarks on the year ahead, the one certainty seems to be change. Of course, that change isn’t restricted to super funds alone.

From MySuper to SuperStream to the Future of Financial Advice (FOFA), the environment superannuation industry service providers operate in is shifting, and according to chief executive officer of Group Life for TAL Limited Andrew Boldeman, insurance provision is an integral part of that shift.

“We're already seeing some of the MySuper changes flowing through at the moment and seeing people think through how MySuper impacts their insurance arrangements, particularly for default MySuper members,” he said.

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“So I think what these changes have done is enshrine an expectation that trustees have to consider the appropriate levels of insurance for those members who haven't necessarily selected a choice.

“Now most trustees would say that they did that before, but I think that the way it’s been written into the legislation, the guidance and so on, many trustees are taking the opportunity to think it through and make sure that there are appropriate default levels of insurance in place,” Boldeman continued.

“So as they split out their MySuper product, most are simply reviewing their insurance at the same time.”

According Frank Crapis, head of industry funds for CommInsure, the current raft of Government reform has turned superannuation fund trustees’ focus to providing more comprehensive insurance benefit packages to their members.

“And there will be fundamental changes required [for that], especially in regard to product definitions,” he said.

“Trustees may be restricted to the types of benefits they can provide within the superannuation environment, as it is likely that any benefit within super will need to meet a condition of release under the Superannuation Industry (Supervision) Act (SIS).

“Thus, some employers are now looking to provide extra benefits outside the superannuation environment as part of a group insurance policy.”

Alternatively, Marc Lieberman, chief executive officer for MetLife in Australia, said that the industry’s proposed legislative change also raised a number of concerns for insurance providers.

“In my two years here in Australia, what I’ve seen in the group insurance market is a highly competitive market, which can be good in terms of ensuring value for the customer,” he said.

“But I think that there’s a lot more room for growth and opportunity around education of the customer, and making sure customers have appropriate levels of cover.

“So with all the regulation and change that’s coming in, that’s probably my biggest concern,” Lieberman continued.

“It’s this question of whether the changes coming through are going to create a situation where the levels of insurance go down, either through auto-consolidation or other changes around FOFA, and we end up having a really exacerbated underinsurance problem.

“That’s something we need to take great pains to avoid.”

Indeed, the problem Lieberman alludes to is one that has already been raised by a number of insurers.

After all, the consolidation of superannuants’ inactive accounts is an entirely appropriate objective but, if it comes at the expense of the insurance held within those accounts, are fund members really better off?

For Boldeman, the challenge is out there for the industry to find a solution that achieves the Government’s objectives but that also don't cause unintended consequences.

“So what the insurance and superannuation fund industries are really looking at is what are the ways of achieving both objectives,” he said.

“And one proposal that’s been put forward is to ask whether there's a way of consolidating insurance at the same time.

“So if someone has consolidated their accounts and they've got $100,000 worth of cover in both funds, well maybe they can consolidate and have $200,000 in the fund that they've consolidated to,” Boldeman continued.

“And I've seen a number of different variants of that proposal in place and there's merit in those.

“There are still challenges though; you've got transition risks, and ‘what happens if I lose the better insurance product in the one fund?’ Or ‘if the fund that I'm consolidating into doesn't have as good an insurance product, do I miss out?’”

Crapis suggested that an alternative solution would be to notify a member of the potential loss of insurance benefits prior to any consolidation occurring.

“We agree that it can be inefficient for members to have multiple funds and be charged multiple fees,” he said.

“In some circumstances, however, there may be valid reasons for a member to hold multiple superannuation accounts, insurance benefits being one.

“Further, if a member’s health, age or occupation has changed significantly between leaving one fund and joining another, they may find it difficult either getting the same level of cover or having the same low premiums that they enjoyed in their original fund,” Crapis added.

“So the balance here is to ensure that the client is aware of the fact that they hold multiple superannuation accounts so that they can make an informed and educated decision.”

Echoing Crapis’ comments, Lieberman agreed that education was the key.

“So if you’ve got an auto-consolidation going on, you’ve got to make sure that the individual understands what they’re giving up in that auto-consolidation,” he said.

“If they had three different super accounts, $1,000 in one, $500 in another and $20,000 in another and they auto-consolidated into the larger one, make sure in that auto-consolidation that they understand the benefits that are associated with each.

“They have to have the opportunity to keep the insurance benefits that may be associated with the funds they’re being consolidated out of,” Lieberman continued.

“Just don’t do it blindly because, unfortunately, most people don’t look at their superannuation account every day, they don’t really pay close enough attention to what benefits may be around it, and you don’t want that auto-consolidation meaning coverage is lost.

“You particularly don’t want the first time someone finds out that that’s the case being when they have to make a claim.”

Yet while underinsurance is a constant topic of discussion for the insurance industry, recent data released by Plan for Life would seem to indicate that inflows into the group risk market are increasing.

So are we to assume that Australia’s underinsurance gap is increasing? Or is the insurance market itself simply getting bigger?

The answer, according to Lieberman, is that it’s both.

“I think it is an indication that the market is growing and an indication that superannuation funds are recognising that insurance plays a significant value-add to their customers,” he said.

“They know that they’ve got to make sure they have a competitive offering when it comes to insurance where, for some, I think insurance was a bit of an afterthought.

“They knew they had to have it but it was at minimum levels,” added Lieberman.

“Now, however, they’re realising that the cost of getting proper insurance coverage is relatively small in the grand scheme of things.

“There’s an awareness now that if they spend a little time and a little bit of money, they can make sure that their members are well protected.”

With regard to underinsurance specifically, Boldeman said that both the insurance and superannuation industries had made good inroads in terms of the level of insurance most Australians have.

“Going back five years ago, it was a much more significant underinsurance gap than it is today,” he said.

“But there's still a lot of research out there that suggests that while we've made good inroads, there's still a fair way to go, particularly on the disability side.

“The majority of Australians are chronically underinsured in the event of disability,” Boldeman continued.

“Income replacement benefits have a very low penetration rate and if people do become disabled, in many cases they've got access to a very small sum that's really only going to get them by for a year, two years at most, from a salary replacement perspective.”

“As with so many of these things, I think there’s been good progress but there’s still a long way to go.”

On the other hand, Lieberman said that measures of underinsurance tended to depend on which report you were looking at.

“Clearly, premiums seem to be going up on the group side and that’s a good sign,” he said.

“But if you ask most consumers about whether or not they have insurance or need insurance, I think there’s still a big gap in terms of the understanding of what insurance is designed to do and how much is the appropriate coverage.

“So I would say that we still have an issue out there,” Lieberman continued.

“I’d like to think it is getting better, but I’d say that the amount of benefit or increase is probably still pretty minimal at this point.

“The industry still has a lot to do in terms of education and really getting people to understand how much they need and why they need it.”

However, if underinsurance is the problem and education an integral part of the solution, the onus is still on superannuation fund executives to ensure they have appropriate coverage in place, regardless.

To that end, their insurance focus seems to waver between having as much cover as possible for as little as possible on the one hand, or having as many options, cover types and enhancements as possible on the other.

Yet for Boldeman, the two are not necessarily mutually exclusive.

“In fact, I think we're probably trying to do both,” he said. “It’s about trying to give good value coverage to everybody but still enabling people with a series of choices.

“And really everybody should be looking at their insurance and making their own decision; it’s just unfortunate that most people don't.”

Alternatively, Crapis pointed out that based on the proposed Stronger Super reforms, insurance coverage provided through superannuation was likely to be restricted to those benefits that meet a SIS Act condition of release.

“So that’s likely to result in more homogenous benefits and features for the insurance coverage provided by funds,” he said. “As a result, funds will need to differentiate themselves based on premiums, sums insured and auto acceptance limits (AALs).

“But service, administrative support and claims management are also features which insurance providers and funds can use to differentiate themselves.”

In admitting that superannuation funds would inevitably focus on price, Lieberman said that he would warn them strongly against commoditising insurance.

“So we don’t play the price game and we don’t try to maximise coverage for minimal cost,” he said.

“We really look at what’s appropriate for the member and for the superannuation fund partner that we’re dealing with and try to come up with a custom solution.

“To me, there’s been too much focus on commoditised pricing and I think it’s going to come back and bite some of the superannuation funds as well as the industry,” Lieberman added.

“It has to be about value, it has to be about customer service, how you’re doing things for the customers, so that when it comes time for claims, you’re easier to do business with, they get their claims processed quickly, they have access to information so that they know what kind of coverage they have and can get questions answered easily.”

“It’s about service, it’s about value, it’s not just about trying to turn this into a commodity so that you get maximum coverage for the cheapest price, because very often when you go out for just price, you get what you pay for.” 

So with that thought in mind and looking to the year ahead, Lieberman said that MetLife’s focus would be education.

“Educating the superannuation fund partners that we have, educating the prospects that we’re working with and really educating them on making the right decisions for their members,” he said.

“We want them to stop focusing on price, start focusing on value and look at long-term value proposition for their members.

“You don’t want to constantly switch because you’re looking for the next cheap price,” Lieberman continued.

“You want to give your customers long-term value, long-term security with a company that will be there.

“After all, you’re talking promises that are made over the next 40 or 50 years, in terms of when the payout comes, and you want to be sure you’re dealing with the right company over that time.”

On the superannuation funds side, Boldeman suggested that ensuring there was an interplay between advice and insurance would be vital.

“I think the big thing from the funds' perspective is really just continuing to update their product and respond to the regulatory change that we've seen,” he said.

“So it’s really around MySuper and the various scalable advice components and just thinking through their advice model and how it interfaces.

“From an insurance perspective, we're just continuing to expand our service and partnering model,” Boldeman continued.

“So the last two or three years we've really spent a lot of time focusing on our claims process and trying to have a consistency of process and service.”

And Boldeman said that the proof of success would be that insurance claimants were also the funds’, and therefore the insurers’, best advocates.

“So for people who've needed to use their benefit at some point, hopefully the process has been quick and easy for them so that they're also advocates for the industry and the benefits of these products,” he said.

“And, to do that, we have to continue to enhance our claims process.

“If we’re differentiated and known in the industry as the insurer whose claims process is the easiest to weave your way through, then we’ve done our job well.”