When Parliament passed the Protecting Your Superannuation Package in March this year, few argued with the intent of the legislation.
Thousands of Australians have multiple low-balance superannuation accounts with automatic insurance attached that is quietly eating away at their savings.
It is generally agreed that clearing up many of these inactive accounts and consolidating them is better for consumers – particularly given the Productivity Commission’s estimate that duplicate insurance is costing $1.9 billion a year in excess insurance premiums (1).
However the practical application of the Protecting Your Superannuation Package comes with unintended consequences, according to industry leaders who spoke at the recent FSC Life Insurance Conference in Sydney.
“What will happen here is: a lot of people will be a little bit better off as a result of these changes and a few people will be devastatingly worse off,” warned David Hackett, CEO of MLC Life. “We need to recognise that risk, and do everything we can to mitigate it.”
Coming fast
Members who decide to keep their cover have until 1 July 2019 to notify their super fund. Between now and then, Hackett explained that institutions had until 1 April to identify members who have been continuously inactive for six months or more; and now have until 1 May to inform those inactive members that their insurance will soon be switched off unless they elect to retain it.
James Carey, Head of Group Insurance at MetLife Australia, estimated 15-25% of funds are likely to be impacted by the changes. “The [final] number will be influenced by the success or otherwise of any engagement campaigns around making a contribution or making that written election to opt-in to insurance,” he said.
Risks for consumers
Members risk losing default insurance cover contained in their super unless they advise their super fund that they want to continue it, said Jenny Oliver, General Manager for Group Insurance at TAL. The challenge for institutions is communicating this to members who have not kept in contact (something that can often happen when people move house, or work overseas, or go on maternity leave, for example).
“The unfortunate thing about the timing is that we’re only going to get the opportunity to engage with these people once or twice,” said Oliver. “We’re not saying that they need to elect to retain their cover. We’re just saying that people need to be aware that this is happening and be empowered to make a decision in their own [best] interest.”
Risks for the industry
Hackett outlined the worst case scenario where some members will miss the communications and not realise they’re no longer insured. Then, after 1 July, claims will be made that are rejected because the cover has expired.
Oliver said she feared the consequences would not only be felt by consumers. “What's going to happen with all the stories that will come to the market, where people couldn't claim because their cover was turned off? And what will that do for the consumer sentiment and consumer confidence in our industry moving forward?”
Given that group insurance is partly priced on economies of scale, a reduction in the number of accounts will likely lead to price increases. Superannuation trustees could then be tempted to consider their options and test the market. While that may appear to be good governance, the danger is that validation and decisions are rushed due to the tight timeframes the industry is working within.
Responding to that concern, Suzanne Johnson, Senior Manager in the Diversified Institutions Division at APRA, emphasised that the industry’s sustainability was a priority for the regulator. “One of the things we are thinking about at the moment is that all these changes are happening at a time when margins are tightening. APRA does not want to see trustees continually pushing for more, for less. Because that creates potential instability in the industry.
“What we’ll be looking for is that – whether it’s going out for tenders or validation – on both sides insurers and trustees are going into this with a realistic view of the future. Our message to both trustees and life insurers is: with any change comes the opportunity for innovation.”
Where to from here?
MetLife’s Carey says that process of innovation has started. “We’re going to have to be creative and innovative to protect both the upside and the downside. We're going to have to have conversations with our funds around how can we achieve those through different mechanisms and controls. And broadly, I'm pleased to say that I'm hearing that the funds are responding well to that.”
Under the circumstances, Oliver also feels that progress has been made: “I think as an industry we did a pretty good job in terms of educating a lot of people from a standing start. [However] we are continuing to operate in a world of ambiguity around some of the elements of this legislation. And I know that's a challenge for our funds, for my colleagues in the industry, and for the administrators.
“We need to continue as an industry to remain very active with the regulators and Treasury, trying to understand what these regulations are going to mean; putting in submissions to try and get the best outcome.”
(1) https://www.afr.com/personal-finance/insurance/productivity-commission-report-slams-poor-value-insurance-through-super-20190109-h19vy8