Group life insurance for the vast majority of Australians is about to go through its biggest shake-up since the 1980s. Younger people are likely to be cut out of their coverage and older people are going to pay more. In theory, it seems like a decent plan, but not everyone is happy. As is often the case, the devil is in the detail.
When the modern era of superannuation started in 1986 with the introduction of ‘Award Super’- (the precursor to the Superannuation Guarantee), compulsory life insurance was actually the main feature. The late Mavis Robertson, then fund secretary of what became Cbus and principal founder of industry body AIST, believed that members wouldn’t have much money in their accounts for a long time but they would have life insurance that they probably otherwise would not have. For workers in building and construction – her industry – that was definitely a good thing.
For the not-for-profit super funds, which cover more than two-thirds of Australian workers, insurance has always been a crucial part of the offering. Now, they are being forced to review their arrangements. Some members may consider themselves better off but others will definitely be worse off.
The looming issue is proposed changes under the Government’s “Protecting Your Super” reform package, first flagged in the 2018 Federal Budget. Under these changes, super members with account balances under $6,000, inactive accounts and new members under the age of 25 will default to no cover and will have to consciously opt-in for their life and disability cover. If you are under 25, the assumption is you are single with no dependents. (We all remember how good those days were.)
Generally, these young, healthy members subsidise older less-healthy ones. Philosophically, maybe it’s a good thing to stop that cross subsidy. In practice, it raises many questions.
The impact on the superannuation industry is actually huge.
According to Ilan Leas, one of three experienced actuaries who recently formed consulting business Retender, the re-pricing of group insurance has already started. The impact on all super members will be dramatic.
Retender looks to take a different, more cost-effective, approach to group life reviews. It focuses on the reinsurers rather than the insurers. Group insurers, of which there are four main survivors in Australia, tend to grab the headlines but the reinsurers, of which there are at least nine, do the heavy lifting.
Leas says: “The Government changes are triggering a repricing of all group insurance and the expected impact could be anywhere from a 10-20 per cent reduction in value for members. Because of the timing constraints, with July 1 next year as the target for their introduction, these impacts aren’t going to be generated in a competitive environment and funds will be pushed to accept the only offer they have received. However, funds are expected to shop around for the best terms and meet the legislated members’ best interest test.”
Retender is owned by its three principles: Ilan Leas, Kent Hopper and Matt Noyce. They believe that big super funds need to be careful about how they approach the up-coming regulatory changes.
According to Leas, in group insurance, around 80-85 per cent of premiums paid by members go to covering the cost of paying claims. According to APRA, the aggregate group cover sum assured is around $4 trillion. Leas said the technical mechanics of the group insurance change included three important aspects:
- First order: Over $1 trillion of cover lost: the roughly $7 billion of premiums in group insurance may plunge to as low as $4 billion. The impact will vary from fund to fund, as young members, low balance-holders and inactive accounts drop out.
Another way of looking at this is that over $1 trillion of cover will disappear overnight for those members. It is then worth asking, what happens when these people want to claim? If they didn’t read their mail for example and take up the option of opting-in for cover, they’ll have no cover after 1 July.
- Second order – Premiums to rise 10-20 per cent
With these lives disappearing out the system and the significant cross subsidy removed, premiums for those who remain would need to go up by 10-20 per cent. (KPMG estimates 30 per cent but Retender thinks that’s a bit high.)
- Third order – Premiums remain steady but sums insured decrease: in response, funds could increase premiums although that’s likely to be unpalatable for members. They could reshuffle cover which means that members will struggle to assess value in aggregate or the more likely option is that insurance cover decreases. Basically, members pay close to the same premiums for a significantly reduced cover.
Under this scenario, it’s not hard to see up to another $600 billion of cover (and claim entitlements) wiped out overnight.
“We also know that higher-risk lives will do this (opt-in for cover), so you could end up with a further spiral in claims’ cost which will have to increase over time,” Leas says. “Also, imagine the scenario where a day after July 1, 2019 (or six months after that if the Government grants an extension), members get $100,000 less than the day before simply because you didn’t read your mail or the fund had your wrong postal address.”
Leas says the ‘anti-selection impacts are critical and difficult to price. “There is a risk of the pool being unwound as unhealthier lives choose to opt back in,” he says. “But at worst, unhealthy lives need to go through underwriting for cover that they have had all these years.”
Unlike fund manager or custodian tenders, insurance tenders are very expensive and disruptive for members, partly because the fund has to contact every affected member of a material change in circumstances. The tender process itself can take more than 9 months and cost over $1 million for the larger funds
Retender’s model is to replace the reinsurer rather than the headline insurer, which should be quicker and cheaper. A reinsurance tender means that rather than running a lengthy traditional insurance tender, funds can run a quicker and still-broad reinsurance tender which addresses 80-85 per cent of the premium cost and helps trustees meet their members’ best interests test and governance responsibilities.
“You don’t need to change insurer,” Leas says. “The price impact flows through the back end and can get passed to members through the insurer in a transparent process”.