Screws tighten on trustees to justify rising insurance premiums

Author: Richard Webb, Policy Advisor Financial Planning and Superannuation, CPA Australia

Insurance in superannuation is under increasing scrutiny as the government looks for ways to boost Australians’ retirement savings.

Indeed, politicians and the media have begun to question the value of providing insurance in superannuation, a position that’s perhaps not surprising given the spotlight on ‘junk insurance’ in the Hayne Royal Commission.

The ‘Protecting Your Super and Putting Members’ Interests First’ reforms prevented the accounts of young members with small balances and long periods of inactivity from being eroded by insurance premiums. An unfortunate yet inevitable side-effect of these measures has been a steady increase in premium costs.

The recently announced duty to act in members’ best financial interests, currently in Exposure Draft, increases the likelihood that trustees will come under pressure to justify rising insurance premiums. This is especially the case in respect of MySuper members who commonly hold insurance coverage by default.

Trustees need to be prepared to quantify the financial benefit of insurance to members, and show it is necessary and competitively priced. The answer could be to extend the product disclosure regime – as was intended all along – and give it a novel application.

The Cooper Super System Review in 2010 recommended standardised disclosure for MySuper products. Product dashboards were subsequently legislated for default members, but a further proposal to extend this to choice investment options languished. Nonetheless, use of product dashboards to provide at-a-glance information for all members remains government policy.

The continuous tweaks to policy in this area was one of the topics of conversation at Investment Magazine’s recent Group Insurance Summit in November.

The time is ripe for renewing calls to extend the product disclosure regime. Extending product dashboards to choice products would enable members to compare MySuper and other investment options – at their own fund or elsewhere.

But it could also be used to quantify the financial benefit of insurance in superannuation.

Conceptually, an insurer is equivalent to an investment manager. That is to say, a trustee places money with an insurer in the expectation that it may ask for the money back at some point in the future. Likewise, an insurer’s fund can be thought of as an investment fund, where a premium is a contribution and a benefit payment is a withdrawal.

To this end, the insurance fund’s profit margin is comparable to an investment management fee. The insurer’s investment return can be used to partially offset the premium paid by fund members. Arguably then, the insurer’s investment return and return target are disclosable interests of the fund members, as is the insurer’s own targeted return on investment.

Other investment fields could also be modified to suit an insurance setting. For example, investment risk, which currently uses the Standard Risk Measure, could be replaced with a measure of mortality risk. A representative benefit could be aligned with the MySuper balance assumption of $50,000.

These metrics, represented in the product dashboard, could allow members, financial advisers, ratings agencies and the public to measure differences between insurance options. It could even provide additional insights for members with specific preferences in relation to assets their fund invests in via insurance, such as ESG exposures. This could assist insurers and trustees to design better products for their members.

Expanding product dashboards to death and total and permanent disability (TPD), as well as income protection insurance, may also help apportion the administration fee between multiple products within a superannuation account – an issue that product dashboards have struggled to overcome.

The introduction of legislation to address underperforming superannuation funds is imminent. Disappointingly, it is again limited to MySuper funds. Underperforming choice funds will escape closer scrutiny – as will insurance products.

Given that the vast majority of investment options in superannuation are choice products, it is beholden on investors to advocate for the broader application of these basic transparency measures. At the same time, there is a strong case to be made for extending product disclosure to insurance in superannuation.

Ultimately, quantifying the financial benefit of insurance in superannuation may be the only way to ensure its ongoing viability.