The past year or so has been a significant one for the superannuation industry. From the May 2018 Federal Budget to the more recent Royal Commission into Banking, Superannuation and Financial Services – the industry has not escaped the attention of the Government, regulators, those with vested interests and even those who couldn’t have cared less a year ago.
In the spotlight
With the spotlight already on insurance, the Insurance in Superannuation Voluntary Code (the Code) was a reaction to growing calls for change. Released in December 2017, the Code proposed a cap of 1 per cent of salary on premiums for default cover and cessation of default cover after 13 months of no SG contributions, particularly for members with low balances. To add to it, the most substantial superannuation changes announced within the May 2018 Federal Budget included those relating to insurance in super, under the Protecting Your Super measures. The key changes included the removal of default cover for members under age 25, members with balances less than $6,000 and members with inactive accounts (that is, no contribution received for 13 or 24 months depending on APRA or ATO rules). After much scrutiny from the industry regarding the unintended consequences of such changes that are likely to result in poorer outcomes for members, the Bill was recently amended and passed in February, to provide clarity on the definition of an inactive member (no contribution received for 16 months) and the removal of insurance for these inactive members.
However, the provisions removing default cover for members under age 25 and balances under $6,000 were cut from the Bill before it was passed, and reintroduced as a separate package, ‘Putting Members’ Interests First’, in a separate Bill.
While it is unclear whether this new Bill will be passed given the forthcoming election, the removal of cover for certain categories of members may have an unfavourable impact on members who maintain their insurance cover in super. Due to the pooled nature of group insurance, the removal of any members from the pool is likely to result in higher premiums for the remaining members. KPMG’s analysis suggests that the overall increase in insurance premiums could be as high as 26 per cent across the industry on average, depending on a fund’s member demographics. Now, this impact seems counterintuitive, particularly given the release of APRA’s Prudential Standard and Guidance on the assessment of member outcomes (SPS 515 and SPG 516), within which funds must substantiate the outcomes delivered to members, including the impact of insurance premiums on account erosion.
A common goal
Although the consequences of the changes may be less than favourable for fund members, they have positively contributed to the degree of collaboration amongst industry stakeholders to strive towards a common goal – better outcomes for members. In light of the considerable effort required for implementation, there has been much activity in improving the working relationship between funds and insurers. As the industry awaits the passing of the ‘Putting Members Interests First’ legislation and many seek to comply with the Code, fund trustees have been working with their insurers to review their arrangements to provide more tailored insurance across member cohorts. Funds are expecting more from their providers to meet the requirements of the Code and to develop appropriate insurance designs for their membership. More advanced insurers have demonstrated to their clients the direct implication of product design changes on members by using artificial intelligence and digital interfaces to showcase global perspectives and provide insight into the local market for forecasting purposes.
There is no doubt the industry is undergoing a re-shaping as funds view the imminent changes as an opportunity to redefine the services they require from insurers and administrators. This has paved a progression towards a partnership approach where there is a greater reliance on both parties to collectively share strategic initiatives, challenge existing processes to build in efficiencies, coupled with an increasing focus on locking in technology roadmaps to deliver greater value to members. To achieve efficiencies in insurance administration, funds are removing the friction between the member, administrator and insurer by minimising the instances of double handling and creating consistency between various touch points to ensure the member is at the heart of the process. This has been further enabled by enhanced automation of processes, integration between portals and real-time reporting to improve the member experience.
Effective enforceability
Further support is given to the provisions of the Code by both the recommendations made as a result of the Productivity Commission’s inquiry into the efficiency and competitiveness of the Australian superannuation system and the recommendations following the Royal Commission. In its final report, the Productivity Commission shares the position that all funds should adopt the Code, recommending that the adoption of the Code should become a condition for fund trustees to maintain a RSE licence. Furthermore, the view is that the provisions of the Code should be strengthened, reinforcing that insurance for members under the age of 25 be provided on an opt-in basis, a provision that featured in the initial draft of the Code and was subsequently removed following industry consultation.
Insurance-related recommendations from the Royal Commission echo that of the Productivity Commission, including addressing related party concerns within APRA Prudential Standard SPS 250 and the matter of enforceability. The Commission recommends that legislation is amended to provide for enforceable industry code provisions, particularly the provisions that govern the terms of the contract made between the insurer and the policyholder. The proposal has received overall support from the industry, addressing the negative sentiment around the lack of enforceability that initially arose at the time the Code was released. However, the enforceability could potentially be redundant in terms of the removal of default cover provisions, given that the Protecting Your Super legislation extends beyond the Code and applies to all inactive accounts, regardless of balance.
Commoditisation of insurance?
Another issue that has caused some stir amongst the industry is the Productivity Commission’s recommendation that key definitions and provisions for default MySuper offerings are to be standardised across funds to enable greater comparability. This is further reiterated in the Royal Commission Final Report. Whilst there is some merit in this recommendation (such as standardising a war exclusion definition) from a comparability perspective, there are additional ramifications to the recommendation that have yet to be thought through from not only a risk pooling and claims history perspective, but also what this will mean for funds that differentiate based on their insurance offering.
In its ‘Royal Commission super insights’ report, KPMG recognises the value of tailored insurance offerings for certain member categories and highlights the need for further consideration to be given to the impact on pricing, ability to tailor insurance designs, suitability for all default members and implementation factors.
This begs one to question the underlying motivation of the commoditisation of insurance by the Government. Perhaps it’s a strategic move to trigger the progression towards a single default fund?
