One size does not have to fit all

Default insurance in super provides an important safety net for millions of Australians who may not otherwise take out or hold life insurance. What’s more, life insurance claims and disputes statistics issued by APRA in June 2019 indicated 84 cents in every dollar collected in premiums was paid back in claims to members – so the cover clearly offers good value. Nonetheless, new ways of working, coupled with an evolving regulatory landscape, presents a strong case for reviewing whether the current system adequately represents the changing profile of Australian members.

A sign of changing times

In recent years, as working Australians’ priorities have evolved and their expectations have increased, some have come to question the value and appropriateness of opt-out insurance in super. To a certain extent, the Protecting Your Super and Putting Members’ Interests First legislation has determined that impacted members are better served by opt-in insurance. Additionally, the Hayne Royal Commission report recommended an investigation of universal terms and standardised levels of cover for MySuper products.

Irrespective of whether the industry agrees with these proposals, the resounding message is that change is due. If Australia’s insurance in super system is to continue to provide Australians and their families with optimal benefits and security, default cover must be designed to be fit-for-purpose and flexible enough to meet a member’s changing circumstances.

Average cover for ‘the average’ member

A new whitepaper authored by AIA Australia—Default insurance in super: One size does not have to fit all—explores how default insurance in super can deliver better outcomes for today’s member base. While AIA Australia maintains that an opt-out model is the best policy setting for working Australians, the whitepaper presents three concepts to better target default insurance cover to a wider cross-section of members – that is, not just to the notional ‘average’ member.

Traditionally, Australians generally sought permanent employment and aimed to remain with the one employer for much of their career. In line with this trend, funds provided super and insurance benefits for relatively narrow industry cohorts, as it was reasonable to believe that the majority of members had similar insurance requirements. More recently however, industry consolidation, increasing employer flexibility, and the feasibility of the freelance economy has given rise to a member base with more diverse circumstances that makes less regular super contributions. Complicating this situation further, research from the AIA Australia whitepaper suggests 61 per cent of Australians would classify as ‘disengaged’ with the insurance in their super, a finding which indicates it’s becoming harder for funds to tailor cover according to their circumstances.

AIA Australia’s whitepaper proposes three default design concepts trustees can adopt in order to provide default insurance in super that’s better suited to the circumstances of a broader cross-section of members: MyNeeds, a cohort-based default design option; SmartCover, tailored to the individual using salary, and FlexiCover, which utilises customer data to determine appropriate insurance designs.

These concepts reflect the changing regulatory landscape as well as willingness from consumers to remain with the one fund throughout their lifetime. With consumer expectations becoming more apparent—specifically, expectations around greater personalisation of offerings in exchange for personal data—there is an obligation on trustees and insurers to ensure insurance benefits remain fit-for-purpose as a member’s circumstances evolve.

One size does not fit all

While we can’t dismiss the enormous value that insurance in super delivers Australians, we must also recognise that shortcomings in the default ‘opt-out’ system puts the onus on the industry to ensure that it’s optimised. If funds are to provide their members with protection most suited to their needs, it’s crucial they strengthen their engagement to better understand what these needs are.

If funds are to provide their members with protection most suited to their needs, it’s crucial they strengthen their engagement to better understand what these needs are.

Education plays a crucial role in this regard. A 2019 study commissioned by ASFA and the Financial Services Council, conducted on the YouGov Galaxy Online Omnibus, indicated that only 23 per cent of respondents had a clear understanding of the life insurance they had through their super; that 21 per cent knew that they had some life insurance through their super, but were unsure of the details; that 33 per cent knew they didn’t have life insurance cover, and that a further 23 per cent were unsure whether they had cover or not.

Presenting an even greater potential for strengthening member engagement are results that came out of the 2017 : almost two in three members ( per cent) would be likely or very likely to switch their cover if a more appropriate option was available. In other words, consumers have indicated they want to be consulted on their insurance options, and to be empowered to make decisions concerning it. If trustees work to deepen their understanding of— and engagement with—their members, the concept of a member having only one or two funds over a lifetime could be a reality.

The opportunity ahead

The need to reassess the value of default insurance in super for members should be welcomed as an opportunity for funds and insurers to work towards optimising a system to deliver better member outcomes. At a time when levels of underinsurance and needs for advice continue to grow in Australia, ensuring default cover is a better fit across a broader membership will drive greater relevance for members and increase the value of the ‘protection’ offered to those covered.

A period of scrutiny, regulation and readjustments has left the future framework of default super unclear. To thrive in this new environment, trustees and insurers must continue to work at understanding membership demographics and ensuring the insurance benefits they offer are in the best interests of more than just the average member.