Insurance in super: an important link in a wider ecosystem

Sustainability of insurance in superannuation is a key priority for APRA in 2022.

As regulators, trustees and insurers grapple with how each of us will address this issue, it’s worthwhile to revisit how important insurance in super is to members and the wider society to understand its role in the wider legislated insurance framework.

A timeline of regulatory change

In response to the Productivity Commission’s findings in their Inquiry Report, Superannuation: Assessing Efficiency and Competitiveness, regulatory reform of insurance through super over the last few years has focused on protecting members’ account balances through  amending how default insurance in super is initially provided (Putting Members’ Interests First – targeted at younger members) and how it’s removed (Protecting Your Super – targeted at inactive accounts).

The Productivity Commission limited its inquiry to how the policy of providing insurance in super could be improved from a member’s perspective. It did not consider  “the broader policy issue of whether insurance should continue to be bundled with super” as that would require further analysis into the extent and form of underinsurance that would occur in the absence of government intervention. 

Recognising the value of insurance in super

TAL recently contributed to an ASFA and Deloitte Access Economics commissioned report, The Future of Insurance Through Superannuation (the ASFA/Deloitte paper) where it was stated that “in 2020, it was estimated the cost to government of underinsurance to be more than $600 million for life and TPD…figures which would be much larger in the absence of insurance held through superannuation accounts”.

Consider if insurance was not available through super. In this hypothetical world, insurance is available only to those who can afford to access it. However, as we know, not everyone can afford or even access insurance, but their need remains.

If a person who didn’t have insurance were to have a disabling event, they, along with their family, would have to undergo a sizeable lifestyle change from previously being supported by their income and earnings pre-disability to one potentially only supported by government-funded social security benefits.

Given these potential consequences, we would assume that most people place a high priority on purchasing an insurance policy. However as noted in the ASFA/Deloitte report, “If it was offered on an opt-in basis, insurance in superannuation would shrink considerably – opt-in rates (where it currently operates) are just 18%”

Why is this rate so low?  As most of us who have been in the industry for a while understand, it’s largely due to how people make choices. We generally prioritise our spending on products that provide us satisfaction in the short term over more long-term purchases which provide delayed gratification or, in the case of life insurance, a potential future benefit (which incidentally is the same reason we’re unlikely to prioritise saving for our retirement!).

Greater levels of government intervention

When there’s a lack of accessibility to a product like life insurance, it has potentially negative consequences to individuals, and has a flow on effect of placing a greater burden on taxpayer funded social security system. When the private sector and individual choice aren’t enough to ensure greater access, greater Government intervention may be required.

This greater involvement wouldn’t be in isolation but would form a chain of other interventions that work together to provide individuals with protection throughout their lives. Whether it be social security benefits, sick leave or Workers’ Compensation insurance, Third Party insurance, or SG contributions just to name a few.

Advocating for accessible insurance

The partnership between the superannuation and insurance industry continues to be an important one to ensure insurance in super is maintained and evolved to meet and exceed community expectations. There are specific areas which need improvement; such as greater simplification to encourage more member engagement, developing more sustainable disability products  and exploring voluntary pathways, but by continuing to provide valuable and accessible insurance solutions we can help ensure Australians navigate their lives with a level of certainty.

If you have any questions with what we discussed in this Regulatory Update or the progress of the reforms below, please reach out to your Client Manager.

Legislative reform update