What does Stronger Super mean for the Insurance market?

Super Strong

The Stronger Super reforms are the biggest change to superannuation in Australia since  the introduction of the superannuation guarantee 20 years ago. The changes are aimed at improving the integrity of the superannuation system, and to provide a better deal for super members who do not manage their own funds.

On its face, this is mostly about the implications for the long term savings industry. But superannuation plays a very significant role in the structure of life insurance as well.

According to the APRA statistics, revenue (mostly premiums) in life insurance products is around 40% in superannuation, mostly (70% of that) Group products. So anything that changes the rules about how insurance fits into superannuation has a major impact on the insurance market.

Greater governance in insurance decisions

Directly, the changes to insurance require Trustees to take a greater involvement in insurance decisions (SPS 250):

The Board of an RSE licensee is ultimately responsible for having an insurance management framework that reflects the risks associated with offering insured
benefits and acquiring insurance and that is appropriate to the size, business mix and complexity of the RSE licensee’s business operations. The insurance management
framework must include the insurance strategies for each registrable superannuation entity required in the SIS Act.

The key requirements of this Prudential Standard include that an RSE licensee must also:

  • formulate and give effect to appropriate selection processes for insurers and due diligence of selected insurers;
  • ensure that insurance policies and accompanying agreements adequately address the minimum requirements set out in this Prudential Standard; and
  • monitor its relationship with all insurers that provide benefits to beneficiaries.

The insurance framework that the insurer needs to have covers all aspects of insurance including insurance types eligibility, claims processes, underwriting processes, Automatic Acceptance Limits and many other aspects.  My expectation is that the requirement for trustees to focus on all aspects of insurance will somewhat reduce the focus on the price; as trustees consider all aspects of the insurance offering to their members.

Insurance requirements in Mysuper product

The Mysuper product, which the government has introduced, is intended a standardised default fund, with the aim of making superannuation more  comparable. There has been considerable discussion about how best to allow for insurance. Most insurance funds have some form of insurance, but the level and definition varies widely. The proposal now  allows carefully defined insurance, on an opt-out basis (unless opt-out is unavailable). According to the information pack,

As part of Stronger Super, the Government announced that all APRA‐regulated funds will be required to offer life and total and permanent disability (TPD) cover on an opt‐out basis (where available, depending on occupational and demographic factors) and would consult on implementation. The Government has decided that trustees must, at a minimum, allow members to opt‐out of life and TPD insurance within 90 days of the member joining a fund, or on each anniversary of the member joining the fund.

However, if trustees are unable to obtain opt‐out cover at a reasonable cost, trustees of MySuper products will be required to offer compulsory insurance, while trustees of choice products can either offer compulsory insurance or no insurance. These arrangements will not apply to defined benefit funds that have insurance cover as part of the benefit design.

The Government also announced that it would consider whether income protection insurance should be offered on an opt‐out basis to members of all APRA‐regulated funds. Following consultation, the Government has decided that it will be left to the trustee’s discretion whether to offer income protection insurance, on an opt‐in or opt‐out basis or at all.  These changes mean that a member’s superannuation will not be reduced by premiums for insurance cover that the trustee has determined is not suitable for their members. Currently, some members are being charged premiums for own occupation cover in TPD insurance policies and other types of insurance that may not be released to them when an insurance payment is made for them, because the circumstances do not meet a condition of release.

The Government will end this practice. The Government believes it is in the best interests of members to align insurance definitions with the conditions of release so that insurance is consistent with the purpose of superannuation and that insurance monies are available to members at the time of their disability.   The Government considers that this change needs to made as rapidly as possible and will consult with industry on an appropriate timeline for the phase‐out of existing policies that are not consistent with definitions of life, TPD and income protection insurance that will be incorporated in the legislation.

Furthermore, to improve transparency and comparability of insurance provided through superannuation, the Government will consult on an approach to ensure that policy terms are disclosed in a standardised way.

MySuper products will be required to offer a standard, default level of life and TPD insurance. Members of MySuper products will be able to increase or decrease their insurance cover (if offered by the trustee) without having to leave the MySuper product.

There may be particular factors at a workplace level that influence the appropriate level and structure of insurance for employees at that workplace. Therefore, within a MySuper product, it will be possible for the standard insurance cover to be replaced by a default insurance strategy tailored to meet the specific requirements of the employees of a particular employer.

A few consequences are likely from these proposals for standardisation. Some are already being seen.

  • Trustees of funds without TPD coverage are starting to introduce TPD.
  • There has been a move towards income protection insurance, which may slow down now that it is definitely not a default option.
  • The move towards consistency of definition of disability between the conditions of release of the fund and the insurance arrangements will probably change disability definitions towards more uniformity – most likely definitions which are more stringent for disability
The most interesting change will be the potential for a move to opt-out. Opt out insurance, of itself, leads to increased risk of anti-selection, as the healthiest people are most likely to opt out of insurance coverage. So the design of the opt-out arrangements – how obvious they are to new members, and how easy the opt-out is to achieve in practice (a tick on a form, or writing a letter to the fund) will make a difference to how much they cost for a fund to achieve in practice.

Transition and lost super arrangements

Auto consolidation of small accounts without activity will be required to be actively pursued by funds, on behalf of the government. Funds which have multiple members will be required to auto consolidate them, and members will be provided with information about all of their superannuation, to assist them in consolidation.

There could be flow on effects to insurance arrangements, as members often have substantially more insurance by being members of a number of funds than they would have in a single fund. For members, the reduction in insurance coverage may be appropriate, but it could create issues if they are not eligible in the fund that is most appropriate for their superannuation savings.

What does it mean for insurance?

Much of the changes to insurance will be consequential changes from what happens to superannuation funds in general in Mysuper. The actions that big super funds take to move towards Mysuper options will lead to changes for insurance.

Insurance is rarely the main game for a super fund, so for insurers, the key to a successful strategy will be watching Mysuper closely, and understanding how the various segments (Industry, Corporate, Retail) are reacting to the changes. If the vast majority of superannuation investment is through a Mysuper fund, which is clearly the aim of the reforms, then insurance companies will need to provide simple, straightforward solutions for all of those superannuation funds.

The most important thing for insurers to do will be to stay close to their superannuation clients. The world is changing for superannuation funds, and insurers will need to change with them.