If insurance in superannuation was switched to an opt-in system, instead of the current out-out, only 2-10 % of people would take up insurance, potentially leaving four to five million Australians unable to obtain any insurance or insurance at reasonable rates. This is the finding of a report commissioned by the Insurance in Superannuation Working Group (ISWG).
The ISWG – which comprises five superannuation industry bodies: ASFA, AIST, FSC, Industry Super Australia and the Industry Funds Forum – has released a draft Code of Practice for superannuation funds that offer insurance, for consultation.
The group is defending default insurance in super. It commissioned KPMG to prepare a report modelling alternatives to default group insurance. KPMG found that default insurance was reducing retirement savings by 6.2% on average by the time members reach age 65, though this “varies greatly” across different income levels and genders.
KPMG’s estimates that changing default group insurance in super to an opt-in system would result in only 2% to 10% of Australians taking up coverage. Additionally insurance would become more expensive and difficult to access due to occupation, employment status and pre-existing conditions.
The report finds that removing all duplicate insurance – by removing cover from inactive super accounts – would reduce the impact of premiums on retirement savings from 6.2% to 6.0%. However this would mostly benefit older and higher income groups.
Removing default insurance cover for young people – under age 30 – would reduce the cost on retirement savings from 6.2% to 5.7%, on average. But KPMG says “this measure is not particularly effective in protecting the retirement savings of those currently most affected, which are low income earners”. Also premiums for the remaining members would increase by between 5% and 15%, due to the increased average age of insured people.
AustralianSuper recently announced that it would stop automatically insuring new members under age 25. The Government has also been targeting the cost-benefit of insurance in super and wants it easier to opt-out. ASFA – a member of the ISWG – has warned that without insurance in super most people would not have cover.
Key measures proposed in the draft Code include caps on premiums, stopping insurance 13 months after contributions cease (only after communicating with members), asking for permission to identify other insurance held in super to limit duplicate insurance, better claims handling, easier to understand contracts and more straightforward opt out processes.
“After 25 years of compulsory super, there was a need to examine the insurance offerings inside super to ensure they were still appropriate and affordable for all members,” said ISWG Chair Jim Minto.
“The draft Code contains a suite of new measures to better target insurance offerings, reduce potential for account erosion and improve the member experience at claim time,” he said.
“Importantly, the draft Code includes measures to address the impact of insurance on retirement incomes and, in particular, the impact on low income earners, young people, those with less secure employment and women.”
The code is intended to apply to APRA-regulated super funds that offer insurance from 1 July 2018, with a one year transition period.
The ISWG is seeking submissions on the draft code, and accompanying consultation paper, by Friday 20 October 2017. Details on making a submission can be found here.