Super fund members could end up paying anywhere between 11 and 26 per cent more for life insurance cover offered by their funds, when changes to the system result in fewer young fund members and those on low incomes having life cover.
Actuarial consultant Rice Warner has issued a report on the Government’s Budget measures affecting insurance in superannuation, estimating that premiums for insurance in superannuation will rise by an average of 11.1 per cent when new opt-in arrangements take effect next year.
This follows a report by KPMG in June, which estimated that premiums could rise by 26 per cent overall.
In this year’s Budget, the Government announced a number of measures aimed at stopping superannuation balances being eroded by unnecessary charges. Those measures, which take effect next year, include opt-in life insurance arrangements for young members and members with low balances, a ban on exit fees and automatic fund consolidation by the Australian Taxation Office.
Life insurance will be available to fund members under the age of 25 on an opt-in basis. The same arrangement will apply to members with balances below $6000 and inactive accounts that have not received a contribution in 13 months. Currently super fund members of all ages are automatically provided with life cover and must opt out if they don’t want it.
Rice Warner and KPMG both expect that a significant proportion of super fund members will lose or give up their insurance cover, when the Budget measures take effect.
Rice Warner estimates that the proportion of industry fund members who will move from opt-out (default) cover to opt-in is 51 per cent, the proportion of retail funds members is 54 per cent, and the proportion of public sector fund members is 27 per cent. Overall, 49 per cent of fund members move to opt-in arrangements.
KPMG estimates that 50 per cent of fund members overall will be covered by the change.
From a premium point of view, insurers will have fewer lives covered to spread risk, and costs will go up.
Rice Warner estimates that death and TPD cover will go up by an average of 7.4 per cent, and income protection cover by 20.4 per cent, with the overall impact an increase of 11.1 per cent.
Rice Warner says: “The increase in premium rates will vary considerably from fund to fund, depending on the benefit design, demographics of the membership and changes to terms and conditions.
“It is important to recognise that the increases will not be uniform across the market but dependent on the extent of cross-subsidisation of existing premium rates across the fund’s membership, the proportion of insured members who are inactive, the proportion with balances under $6000 and the proportion of members under age 25.
“Increases will also be dependent on current rules for retention of insurance for inactive accounts and the approach that funds put in place to deal with opt-in.”
It says that after the Budget changes, the option to cross-subsidise will be reduced as younger members will be removed from the insured base. “Members between ages 35 and 55 are paying premiums that are lower than their true premiums.”
A spokesperson for Rice Warner says the different estimates in its reports and the KPMG report are due to different funds being sampled and different assumptions about the way policies are sold, such as the mount of cross-subsidisation in premium pricing.