Untangling the new super rules

Over the past 12 months, two new pieces of legislation have significantly reshaped the group life insurance landscape in Australia.

On 1 July 2019, the Federal Government’s Protecting Your Super (PYS) package came into effect, followed by the implementation on 1 April this year of the accompanying Putting Members’ Interests First (PMIF) legislation.

The result has seen a significant number of superannuation members losing their insurance cover and an opt-in system that now places responsibility for cover squarely on the shoulders of fund members.

PROTECTING YOUR SUPER AND PUTTING MEMBERS’ INTERESTS FIRST: A FUNDAMENTAL SHIFT

PYS legislation aims to reduce the number of inactive, duplicate accounts in the super system and the depletion of low account balances by fees and insurance premiums.

Members with multiple accounts were found to comprise a third of all accounts (about 10 million), causing the erosion of balances in the order of A$2.6 billion per year in fees and insurance.

The PYS legislation requires the cancellation of default insurance cover in a member’s account that has not received any type of contribution for 16 months or more, unless the member elects to keep their insurance. 

Inactive accounts with less than A$6,000 are rolled over to the Australian Taxation Office (ATO).

The PMIF legislation cancels life insurance policies for super accounts of less than A$6,000, as well as for new fund members aged under 25 — unless those affected have nominated to keep their cover.

‘PYS and PMIF have fundamentally shifted the way Australians access life insurance through superannuation,’ says Phil Patterson, head of group insurance solutions at Willis Towers Watson.

‘What was once offered as a default product for all Australians is now under a voluntary opt-in basis for significant groups of members. This places the onus on the customer, requiring them to better engage with their super and their insurance.’ 

INSURANCE COVER DROPS AWAY

In July 2019, the Association of Superannuation Funds of Australia (ASFA) surveyed its members on the impact of the new legislation. 

Based on the responses, ASFA estimated that three million accounts were likely to lose insurance cover as a result of the PYS changes and that the PMIF legislation could impact about 1.6 million accounts initially and up to 100,000 accounts a year on an ongoing basis.

Speaking to the Financial Standard in April this year, a spokesperson from life insurer TAL said the combined effect of PYS and PMIF was to ‘remove around 30 per cent of [superannuation] members from insurance policies’ resulting in a ‘fundamental change to the group of members being insured within each individual superannuation fund across Australia’.

Despite significant preparation for the introduction of PYS, ASFA’s 2019 survey found just 47 per cent of Australians were aware there would be changes to super, with only one in five of those having a good understanding of what the changes were.

Further, the data indicated an average opt-in rate for insurance cover of just over 16 per cent, although this varied significantly between funds, from 7 to 40 per cent of those affected.

IMPROVING COMMUNICATION

Jenni Baxter, who leads the insurance and fintech teams at Rice Warner, says super funds have generally put in an enormous effort with member communications around insurance.

‘Engagement levels have certainly increased following this, as evidenced by the spike in call centre activity,’ Baxter points out. ‘Unfortunately, default insurance and, in particular, the new rules for it switching on and off, is complex and therefore inevitably not always well understood.’

Russell Mason, lead national superannuation partner at Deloitte, suspects many fund members don’t yet understand the new rules, especially those members who had left a small balance in an inactive account to maintain cover.

‘I’m aware of a number of industry fund clients who are continuing to receive insurance claims from members whose cover ceased as at 1 July last year, despite extensive communications by the funds to members,’ he says. 

‘Whether the communications were not read or not understood is debatable; however, clearly there are still a number of members of super funds who do not yet realise their cover has ceased.’

Patterson says implementing PYS and PMIF was a huge practical challenge for insurers, super funds and their administrators, especially because they had to meet short regulatory deadlines.

‘Moving forward, we need to lift the bar on communication and engagement with members so that awareness and understanding does improve to enable members to make the right decisions for themselves,’ he says.

‘Members can no longer rely on the default system to keep them covered, and the industry is bracing itself for the inevitable complaints and reputational challenges from members who didn’t understand, or were disengaged, and find their claim denied.’

INSURERS ARM WRESTLE WITH RISK AND PRICING

One year on from implementation, an increase in premiums is the most visible impact of PYS. An ongoing challenge will be to avoid a spiral of ever-higher premiums leading to more and more healthy members opting out.

Reporting an increase to premiums of 34 per cent for the members of four funds insured by TAL, the Financial Standard quotes the life insurer as saying that removing members from the shared insurance risk pool requires insurers to ‘reassess the risk associated with those smaller groups of members’.

‘In almost all instances, this has unfortunately resulted in an increase in premiums for those members who continue to be insured,’ the spokesperson reportedly said.

Patterson says premiums have increased by an average of around 15 to 20 per cent across the industry, mainly in total and permanent disability and income protection. 

He says this is partly attributed to the selection risk generated by unhealthy members being more likely to opt in but confirms TAL’s position that the more significant reason is due to the large reduction in the proportion of inactive members.

‘We are, however, yet to see the full premium increase effect as some funds were able to defer the implementation of the PYS increases,’ he adds. 

‘PMIF will generate another round of increases, but current indications are that they may not be as large as those for PYS.’

VULNERABLE MEMBERS IMPACTED

Perhaps a more disturbing impact of the legislation relates to members under the age of 25.

Mason points to one of his clients in a blue-collar industry where super fund members are predominantly male, education levels are often low and the average age of fatherhood is around 22.

‘These members need insurance cover,’ he says, ‘and, sadly, in my experience of this fund, over a period of around 30 years, many of the deaths and disabilities are those under age 25.’ 

Patterson adds that ‘inactivity’ in superannuation funds occurs for multiple reasons, ranging from caring for a sick parent, going on parental leave or even becoming self-employed. 

‘Better engagement with members is the key, through the use of smart, personalised technology linked to salary or contribution data, enabling funds and insurers to understand where customers are within their employment journey,’ he says. 

CONCERNS ABOUT THE NEW REGIME

According to Patterson, the fundamental principle of PYS is sound, but PMIF is ‘a dangerous step further’ in its assumption that ‘low-balance contributors don’t need insurance until their account balance reaches $6,000’.

‘PMIF creates potential gaps in cover when a person changes employment or changes super fund, and it will be the most disadvantaged and least engaged members who will fall into that gap,’ he says.

‘A great strength of group insurance has been its simplicity and affordability arising from its very broad coverage. 

'Unfortunately, in our view, PMIF adds complexity and reduces the breadth of coverage so that the integrity of the group insurance pool is reduced and premiums increase as a result.’

Mason is not a fan of either PYS or PMIF. He argues that prior to the introduction of the legislation, some funds did have the balance right between an appropriate level of premiums and cover and the erosion of benefits.

‘Yes, in some cases members were paying too much in premiums or did not have appropriate levels of cover, but this wasn’t, in my view, a reason to introduce PYS,’ he says. 

‘Now that we have it, we need to adapt. Educating members about the value of life insurance has become even more important. Hopefully, this will result in good engagement and members opting in to cover where they might otherwise not have received it.’

THE WAY FORWARD

Clearly, PYS and PMIF are a wake-up call to the industry to better engage, self-regulate and refine its product offering.

‘The implementation of PYS and the auto consolidation of small, inactive accounts to the ATO should be applauded for addressing the biggest issue in account balance erosion — the proliferation of duplicate accounts, many with duplicate insurance,’ says Patterson.

‘Now insurers and trustees need to focus on good, affordable insurance design for active members and others who need it.

‘To rest on our laurels will only generate additional government oversight and further lead to the de-grouping of group life insurance.’

COVID-19 IMPACT ON PYS AND PMIF IMPLEMENTATION

COVID-19 asks further questions of an industry still grappling with the pricing, product and implementation issues of Protecting Your Super and Putting Members’ Interests First.

Willis Tower Watson’s Phil Patterson says the vast majority of group insurance policies are fully insuring potential claims that may arise from COVID-19. 

Some policies contain a pandemic exclusion clause that may have subsequently been rolled over to other insurers. However, it is limited in its scope and won’t affect many members. 

‘We further understand this clause has not been invoked by the insurers for the clients we work with,’ says Patterson.

At this stage, it seems likely that the number of direct death claims from COVID-19 might be limited, as the overall number of deaths in Australia is small and concentrated in older ages where group insurance typically does not apply. 

‘It is too early to tell whether COVID-19 has a long-term effect for claims under TPD and income protection insurance. We hope that it will not,’ says Patterson.

While the direct claim effects from COVID-19 may be limited, there is a possible secondary effect: any recessionary environment could mean higher rates of unemployment, leading to increased mental illness and an associated higher number of disability claims.

Then there is the issue of allowing people to access their super early to assist them through the COVID-19 crisis. 

While this could have the unintended consequence of loss of insurance for accounts that subsequently fall below A$6,000, Patterson believes this is unlikely to happen.  

‘Any reduction in account balance from a high point that exceeds $6,000, due to investment market falls or partial withdrawals under the new early release scheme, will not affect insurance cover in the short term,’ he says.

Another emerging question arising from COVID-19 is the potential effect on ‘income’ and ‘salary’ as defined in income protection insurance for members being stood down or receiving the JobKeeper allowance.