Insurance in super changes: bridging the gap between knowing and not knowing
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While there has been much commentary about the topline changes to insurance in superannuation that were announced in this year’s federal budget, many funds have a gap between what they know and what they don’t know when it comes to the impact of this change.
What is known, are the proposed changes. From 1 July 2019, the government will change the insurance arrangements for certain categories of superannuation members. Insurance within superannuation will move from a default framework to be offered on an opt-in basis for the following groups of members:
- Superannuation fund members (new members) under 25 will no longer have life insurance on an opt out basis
- Superannuation fund members with less than $6,000 in their account will no longer have life insurance on a opt out basis
- Insurance cover for those members deemed inactive for a period of 13 consecutive months will be removed.
What is not known, is exactly how the industry is preparing for this change given implementation is now 12 months away.
From our perspective, we are working closely with our partner funds and trustees to bridge this gap and prepare them and their members for this change, because we deem it very significant.
Primarily, funds need to engage their members and get them to act and respond. As we know, superannuation members tend be more disengaged and there are a number of hurdles that will need to be overcome if we are to improve the average Australians’ understanding and awareness of the potential impact to them.
In order to help our funds prepare for this, our first step is to help them become fully aware of the entire scope of change. While the above three changes are generally well known and understood, there are a few other impacts that may take many by surprise:
- The proposed legislation impacts all members with less than $6,000, regardless of age. Even if the member is active and receiving contributions, their default cover in superannuation will automatically be taken off them if their balance is below $6,000. This means active working Australians, young families, part-time workers – of any age - could be impacted. While it mainly relates to default opt out cover for death and TPD, it can also mean default income protection (IP) if that is part of the fund’s offer.
- The proposed legislation impacts those who have not been active for 13 months, even if the member has a high balance. This includes those who have built up their balance over time but may have stopped work for a while, taken a career break or taken extended parental leave and not contributed for 13 months. For many, they would just assume their cover continues but this will not be the case.
- There remains some uncertainty about the options available to new members (from 1 July 2019) who can no longer be provided with automatic cover under the new rules but who request cover. If they want cover what process will apply? Will some underwriting be involved? Will there be an option for some concessional underwriting if they apply for cover within a window period of their new job? Will they qualify for cover? Will standard terms apply, or will exclusions apply? This remains a live discussion and something insurance providers and superannuation funds should consider and decide on.
In light of these impacts, there are some really important considerations that members should be made aware of and take action on.
The second part of our engagement process with our partner funds is tailored analysis that uses data from the funds. While we hold the claims data, the fund holds the membership data and that complementary data insight is critical to ascertaining impact.
We are working with our partner funds and providing them with an analysis of the impact to their fund, based on the membership data from the trustee. Whenyou carve out members who lose their cover and take them out of the insurance pool, it does potentially put upward pressure on rates and we can help funds understand indicative premium impacts based on their fund’s membership.
Taking a historical lens to the future scope of impact is also important. In an opinion piece published in The Australian Financial Review , ASFA CEO Martin Fahey noted that in 2015-16 there were 300,000 households with the household head under 25, which included 60,000 dependent children. In reviewing our own claims data at CommInsure, we have seen more than 600 claims in the past five years with over $60m in benefits paid to members who are less than 25 years of age, with around 25 per cent of those claims related to accidents and 10 per cent to mental health.
So, funds will need to play a huge role in devising an action plan and generally ramping up their communication strategies to members, if the funds are to address the potential disengagement barriers. Young members, lower account balances, and workers on extended leave, career breaks or parental leave are all potentially impacted, and they may not know it. KMPG expects between 2% - 10% range in response rates under an opt-in arrangement.
Funds must determine the frequency of monitoring and identifying inactive accounts (for instance, monthly, quarterly), but it must be ‘reasonably’ frequent to ensure compliance. They must also provide written notification to members of inactive accounts at six months, nine months and 12 months before switching off cover at the 13th month.
Above all, we need to remind ourselves of the intent of group cover – to provide members with basic cost-effective insurance that protects them and their family against economic loss as a result of injury, illness or death. Just because someone doesn’t respond to a marketing campaign or actively engage in their offer, itdoesn’t mean they don’t need the cover. And that’s the part where we all need to work in partnership together.
1 Alice Uribe, afr.com - Young super members unlikely to opt-in to life insurance, premiums set to rise, May 13, 2018