The Reverend Dr Peter Jenson, Anglican Archbishop of Sydney, recently made the point when discussing the proposed industrial relations reforms that choice for one person at the expense of benefits already enjoyed by others may not necessarily be in the community’s best interests.
With regard to insurance for superannuation fund members, I believe that unless trustees and insurers now consider some key issues around the real needs of members, the introduction of Choice may not be completely in the superannuation community’s best interests either.
The Development of Insurance Benefits for Fund Members
The insurance industry has over a very long period of time developed significant benefits for members of group plans over and above those otherwise available to them as individuals. Not the least of these is the considerable cost savings and the ability to achieve some level of automatic insurance cover without supplying health or other underwriting evidence.
The reasons for this are simple and I’m sure understood by most. Where an insurer has the opportunity of insuring a large group of lives on a defined eligibility basis, the element of selection is removed. It can be assumed that amongst the lives to be insured will be some good risks and some bad risks. The larger the group the more the proportions will equate to the statistical norm of the community overall, and therefore a more accurate life insurance pricing can be placed on them. Where defined eligibility does not exist, selection (where an individual in poor health intentionally “selects” an insurance arrangement that covers them) causes the insurer to have to fully underwrite and charge a higher premium.
So what is likely to happen as the new Choice of Fund legislation evolves?
I have never been of the view that great or dramatic change will quickly flow from Choice. Rather, I expect changes will be modest and will enter the system gradually, driven by increasing competition between industry and master funds.
I believe in most cases members will not be easily enticed into making a change from the fund of which they are a member at the moment. Not just because of complacency, but because they are largely content with the management and expertise of the trustees running their current fund.
However, we are in an environment where industry funds have changed enormously over the last 10 and even five years. Funds that commenced their operations with their major selling point being low cost and simple design are now touting their corporate offerings, defined benefit designs, multiple investment choice and providing public offer sections.
From the insurance perspective, many funds now offer the ability to increase the “default” level of cover, they accept substandard lives subject to loadings or exclusions and are looking to extend their product range and services to a much more sophisticated level. What we then find is that natural competition between the industry funds creates an environment where insurance is becoming increasingly important.
Retaining members
In practice, administration costs, investment returns and insurance are the key features that one fund might claim as an advantage over another in order to positively impact member retention and, of course, to grow its membership base.
Investment returns will always (I suspect) be an issue of competitive interest, although the investment environment over the last five to 10 years has not lent itself to the fierce marketing of returns we saw in the 80s and 90s.
Administration of superannuation and master funds has improved significantly over recent years and, in spite of increased demands on administrators, costs in my view have tended to remain relatively low.
The Emerging and Urgent Need
In the recent past, insurance has been low on the lists of priorities for most members and possibly trustees. However, as a recent Investment and Financial Services Association study showed very clearly, most employed people in Australia are now very much under-insured. This no doubt relates to our spiralling house prices and accompanying mortgages, along with our penchant to live off debt rather than earnings. No matter what the reason is, the fact remains that members of the working community have to have insurance protection that matches their current needs. The question is where should they seek it?
In my view, the most efficient, easiest and cost-effective way to access increased insurance cover will be through superannuation funds or master trusts. I believe that industry funds that address this issue with quality product offerings at competitive premiums will enjoy a major marketing advantage over their competitors.
The Opportunity
Therefore, the ramifications of individual member choice, whilst not great initially, highlights an immediate need and opportunity for superannuation fund trustees to rethink priorities and develop better, more tailored insurance products for their members. I have to say that product development in the group insurance arena has been almost nonexistent over the last decade and in some areas (particularly disability income insurance) it has gone backwards.
So, whilst fund choice is unlikely to cause an immediate landslide of members wanting to move funds, it will keep prudent trustees on their toes. The bottom line is that those trustees who consider their member’s actual needs, rather than perceived ones, will win the battle to retain and attract members by providing products and services that fully meet those needs.
In contrast to the point made by Dr Jenson regarding the possible impact of industrial relations reforms, the introduction of Superannuation Fund Choice is making a positive difference for fund members, and therefore must be very much in the interests of the Australian community.
Phil Collins is general manager — Group Risk with IUS (International Underwriting Services)
