Opt-in insurance in super to increase premiums by 26%

Insurance premiums in superannuation are estimated to increase by 26%, according to an analysis by KPMG, as a result of the Government’s proposal for opt-in insurance.

Included in the 2018/19 Budget, and recently introduced to Parliament, the proposal would mean insurance in super would be on an opt-in, instead of the current opt-out, for new members under age 25 or for small or inactive accounts.

KPMG finds this would push up insurance premiums, as a result of a reduction in Group Life insurance cover. It is estimated that there would be a 50% reduction in the levels of Group Life insurance cover and a 42% reduction in insurance premiums collected. Most of this change is the result of removing cover for accounts with balances under $6,000 and those which are inactive and haven’t received a contribution in 13 months.

“We believe this will have an adverse impact on insurance premiums, and could result in an increase in average Group Life insurance premiums of 26 percent across the industry,” says KPMG.

KPMG notes in its report that many super funds cross subsidies insurance preimums from young to older members. This cross-subsidisation also extends to small accounts.

“To the extent that there is a cross subsidy in the insurance premium rates, removing default cover for younger members means the premium rates need to rise to compensate for what is effectively an increase in average age and risk within the overall insurance pool.”

The opt-in change is also expected to result in those more in need of insurance to opt-in while healthier members opt-out. Additionally insurers will likely see a “significant” reduction in revenue while their fixed costs are unchanged. These three pressures are expected to result in higher premiums.

Currently insurance premiums are expected to erode 6.2% of average final retirement balances. KPMG estimates that a 26% increase in premiums will increase this to 7.3% erosion, “which is a significant increase for superannuation fund members as a whole”.

“But here, the average does not tell the whole story given the impact may vary greatly depending on individual member circumstances,” said KPMG in the report. Females and low income earners are expected to be the most negatively impacted.

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