Is this game over for default Insurance under Superannuation?

The Federal Governments new “Protecting your Super” Package (PYS) comes into play from July 1st 2019. As this time draws closer we are seeing a rapid changing of pricing for default insurance cover and the terms and conditions that define what and when the insured person can claim. So why is this happening and what do you need to know?

We take great efforts to ensure that we aware of all superannuation funds that our clients have in place but even for professionals like us this can be a cumbersome process. Many of our clients have intentionally kept superannuation funds open for one reason or another and are now at risk of losing these due to not only this legislation but the consequences of this and market forces that dictate insurance premiums.

What is PYS trying to achieve?

  • The removal of exit fees on all superannuation accounts;

  • A 3% cap on all administration and investment fees for balances below $6,000;

  • Consolidation of low balance inactive accounts via the Australian Taxation Office (ATO); and

  • The removal of insurance cover from inactive accounts, unless the member specifically requests the Trustee keep this in place.

No high fees and removing insurance cover we don’t need. How could this be a bad thing? Well on the surface this is a great sentiment. Many Australians lose track of superannuation and this slowly gets eaten by fees or insurance premiums. Protecting Your Super is designed to solve this problem and will likely do so well.

The reality is never so simple.

The majority of Australians are not engaged with Superannuation until they need to be. The 2 primary triggers for this are when they come close to retiring or need to make a claim on insurance cover.

Having multiple funds paying multiple fees is not an effective way to build retirement savings in many cases but some funds have benefits that many are not aware of. These will be lost. Fortunately there are a few funds such as GESB, WA’s largest fund, that are not required to impose these changes on its members.

Any adviser that handles claims on a regular basis knows that many clients that find themselves shocked by life changing news are often very relieved to find they have multiple superannuation funds with default insurance cover in each. This often pays off a mortgage or allows a non working widow funds to look after children etc etc.

Sure if you are under 25 and have no dependants it is likely you don’t need this cover and the premium will diminish your retirement savings. The Government’s reasoning for this must be sound….not really in my opinion. Insurance at its very core is designed to share the cost of a claim across its policy holders. Sure premiums go up as you get older (or insured amounts decrease in most industry funds) but ultimately the younger and healthier members pay for the older members who are more likely to claim. This old knowledge is changing fast and many are getting caught out.

So when did insurance become so expensive?

Well this is actually a very complex problem but we will try and boil it down. Firstly, people are realising they actually have cover. MyGov and all kinds of handy search tools are helping Australians to realise they have multiple super funds. No win no fee lawyers spend great time and expense making claims on default insurance cover under these multiple funds that the client was likely unaware they could even claim on. Add this to the rise of mental health claims fast overtaking back and musculo-skeletal claims you have Income protection policies having a far higher rate of claims than ever before.

The second part of the picture really has nothing to do with insurance. An insurer is required by law to hold funds required to pay all claims in a statutory fund. As this fund needs to be liquid they are restricted in that they can not invest in long term, higher performing assets and need to invest in highly liquid assets with low probability of a loss. In simple terms this means they need to use term deposits and cash not shares and direct property like your Superannuation or investment fund might. If you have been paying attention you will know that interest rates, and therefore term deposit rates have been very low for quite some time.

So, more claims being paid and less money being earned on savings. Australian insurers have been making a loss on income protection for almost half decade due to this trend. There are gains from life and TPD insurance, often held at the same time, that have been offsetting this as people are actually living longer and better treatments are extending average working age.

why have default cover premiums not increased until now?

When you enter into an insurance contract, through an adviser like us, you are highly likely getting a “Guaranteed renewable” contract. This means that, as long as you continue to pay the premium, the insurer can not cancel your insurance or amend terms to your detriment. They can increase price but are careful about this as premium increases, like we have seen over past 2-3 years, lead to high cancellation rates or people moving to competitors who may have a less risky (younger) pool of clients and can offer a lower price.

Your default insurance cover is provided by an insurer to your superannuation fund. You do not hold a contract with the insurer and the Super fund reserves the right to alter this cover as it sees best fit for all of its members. The fund trustee will negotiate with an insurer on behalf of all of their members and this tender process can even be more than twice a year.

Industry Super is a highly competitive market made up primarily of lower balance members with low financial literacy. When one fund offers covers of $100,000 of TPD cover for $2pm and the other for $10pm which fund do you think people will switch to. This was especially prevalent with Australian Super raising premiums a few years ago and facing high backlash for doing so. Then in a miracle negotiation that they publicised here (please note that The New Daily is owned by Australian Super so this might not be an entirely impartial article) they slashed premiums. How did they do this? Well the simply reduced premiums and altered the terms of the contract to the point where far few people could claim on it. Simple.

To add to this we hear of a curious tale (during the second week of June 2019 as this is being written) where a super fund has written to all of its members asking them to “Opt in” which renews their insurance cover. A smart cookie noticed that the wording said that the new policy began on X date, in 2019. For a client that has had cancer, which was treated and not claimable in 2017, they would have been covered for death, TPD and IP if this cancer were to lead to claim in future. Now this diagnosis pre dates the policy start date and is now a “pre existing condition” which is not covered. Most of these communications are sent by mail. Some might argue that this is good practice as it is harder to miss in the many emails we get but it also helps that once you sign and return this letter you no longer have copy. If you know what we are talking about we would love a copy of this letter so please send one to us to confirm this. We would love to name and shame but we have not confirmed this to date.

So what can you do?

When all is said and done we live in a post royal commission world that has insurers closing their doors and selling out by the day, premiums go up and policy conditions are lengthy and confusing. There are codes of practices that are improving the good faith of insurers but there is still the commercial reality that insurers are not charities and can not pay out more than they make. Without this sounding like a shameless plug you need a good adviser that knows what they are doing and wont let you fall through these cracks, she'll be right mate just doesn’t cut it these days.

As always this blog is general advice only and you should not act on anything without consulting a professional. Many articles have been written on this over last few weeks including this in The West and another on ABC

Shaun Clements