Finding the competitive edge

If one thing has become crystal clear for Australia’s super industry throughout 2006 and 2007, it is the reality of the highly competitive market in which it now exists. Funds are finding themselves fighting for distinction when it comes to their offerings and, according to Helen Troup, executive director of life risk for ING Australia, insurance is taking a leading role.

“In the last few years, I think we’ve seen a silent insurance revolution,” said Troup. “Awareness, both of insurance itself and of what it does, has gone through the roof. Trustees and financial planners have woken up to its importance and they have realised that it is a very real need for fund members today.”

Troup is not alone in her belief that the momentum towards insurance will continue, with many industry executives tipping offerings improvement to continue throughout 2008, despite the rockier road forecast for investment returns.

Phil Collins, general manager of life for International Underwriting Services (IUS), said insurance had clearly become a focal point of the superannuation package.

“Return levels this year may be far less than the funds, fund members and the market itself are used to seeing given recent years, but I can’t see there being a diminishing focus on insurance,” he said. “Certainly, fund managers may approach the situation in different ways, but super’s competitive market will ensure that giving their members adequate cover stays front of mind.”

Troup added that one could even argue that in a low returns environment fund members needed to have strong insurance options available to them, even more than when markets were buoyant.

“After all, the chances of an individual experiencing death or disability are independent of the stock market,” she said. “And you certainly don’t want your investment returns and your insurance cover to be suffering at the same time.”

Fortunately, providers are not the only ones to see insurance retaining its importance despite market pressures. With First State Super having significantly improved its insurance offering late last year, acting chief executive officer Graeme Arnott said providing adequate insurance cover at an affordable premium would remain a key issue.

“Because of this, First State Super lifted its automatic insurance offering, increasing the basic level of cover from one unit to three units,” said Arnott. “And increasing the level of cover for each unit between 5 and 64 per cent depending on the member’s insurance category and age.

“But the primary motivation in lifting our offering was to ensure members had adequate cover,” added Arnott. “The level of investment returns had no bearing on this decision.”

Of course, the role of insurance within a volatile returns environment is not the only challenge that the industry now faces. Increased awareness has meant increased information, whether it be through published media or the insurers themselves. But with the bearing that fund membership size and occupation has on both premiums and level of cover, it seems comparisons are becoming harder to make.

For Collins, though it is reasonable to expect that comparisons will be drawn between various funds’ insurance offerings, interpreting those comparisons will always be problematic.

“By and large, such published comparisons are erroneous, or at the very least misleading,” said Collins.

“Every fund is structured to suit its own membership and there are still target demographics that can differ greatly despite [funds] casting a wider net now,” he continued. “Often claims experience and the available benefit options aren’t taken into account, so the premiums reported may be very different.

“The focus needs to be on matching like for like, but it’s not always easy.”

Not surprisingly, Collins isn’t the only insurance executive to doubt the accuracy and usefulness of comparisons between various fund offerings. According to Michael Bourke, MetLife’s head of institutional business, comparisons are useful for benchmarking purposes, but only if all factors affecting the bottom line are taken into account.

“There are probably four major components affecting a fund’s insurance offering,” he said. “Occupation, the gender distribution, age demographic and the fund’s claims experience.

“And they are all ingredients going into the pricing and benefits mix that is provided to a fund,” continued Bourke. “So when it comes to benchmarking, it is important that all of those ingredients have been taken into account.”

However, as Troup points out, offering a competitive insurance offering to superannuation funds is not just about premiums and level of cover.

“Competition between funds demand that managers compete on both price and product,” she said. “And we’ve seen this already, specifically with enhanced benefits in income protection.”

According to Troup, the value of income protection for fund members, irrespective of age, cannot be underestimated.

“Statistics show that around 30 per cent of employees will have cause to take more than three months off work during the lifetime of their careers,” she said. “And the reality is that sick leave only lasts so long.”

For Collins though, it is important that insurers structure their income protection offering correctly to ensure competitive premium rates.

“High levels of returns in recent years, coupled with the superannuation guarantee, have meant that even those in their 20s have healthy super account balances,” said Collins. “So if insurers have the right framework in place, there’s no reason why the cost of income protection needs to be prohibitive for anyone.”

Costs aside, Collins said that there were other very compelling reasons for funds to be providing their members with income protection cover.

“The fact is, qualification for total and permanent disability (TPD) is becoming increasingly difficult, especially in light of medical advances,” Collins continued. “But more than that, we’re seeing a trend towards getting people back into the workforce where possible, regardless of disability. In that kind of environment, income protection isn’t just viable, it’s sensible.”

From the fund perspective, Arnott said that income protection was undoubtedly an important part of their offering to members.

“Income protection insurance is a valuable offering,” he said. “And First State Super offers this to members if they wish to insure themselves against short-term temporary disablement.

“Any worker who relies on their income to meet financial commitments should insure that income.”

Bourke said that the key point when it came to income protection or any value-adding insurance product was the trade-off of insurance benefits.

“We’re at a point now where funds offer pretty much all available insurance options to members in a variety of packages,” he said. “But every option costs money.

“That said, income protection insurance is almost the most important protection that an individual with a family can have throughout their working life,” added Bourke. “So it’s about finding a balance. And an individual will always be better served by obtaining advice in order to determine what’s best.”

So it seems that while income protection insurance has become a more mainstream offering for super funds, there is still some ground to cover before it becomes part of the traditionally accepted default cover. Collins’ suggestion is that a blending of products might be the answer.

“When it comes to income protection insurance, it is important to remember that we are not suggesting that it is a cover that could ever replace TPD,” he said. “Because that sort of lump sump payment is very valuable. Rather, IUS is working towards blending the two products together such that an income is paid to the member during the period in which a TPD claim is being assessed.”

“We feel that kind of structure takes a great deal of the anxiety out of the process.”

While admitting that flexibility was always desirable when it came to insurance, Russell Mason, principal at Mercer Human Resources Consulting, warned that trustees and insurers had to be careful in what they provided to members.

“Flexibility is great,” he said. “But there have been instances in the past where a fund has offered a range of benefit payment options and member claims have attracted more than a passing interest from the ATO [Australian Taxation Office].

“Trustees need to be wary of the tax consequences.”

Alternatively, Troup said insurers need to be focused less on offering funds a range of benefit payment options and more on the claims process.

“At ING Australia, our thought process is more along the lines of how we can make trustees’ jobs easier,” she said. “We feel that there are clearly improvements to be made on many levels, from getting insurance benefits to fund members quicker to helping them avoid the tax issues associated with payment.

“Momentum towards insurance is great at the moment, but we’ve got to back that up by ensuring that members are getting the money they need when they need it.”

However, despite a general consensus among insurers that awareness of their product has increased and that things are moving in the right direction, not all is well in their world. After all, one need only look as far back as last year’s Financial Planners Association (FPA) national conference to realise that for many, the oft-lamented tax and regulatory environments in which insurance is delivered to the super industry is considered as crippling as ever.

To Troup, there should be little difference between health insurance and life insurance.

“It’s baffling,” she said. “We provide as much social benefit to Australia as health insurance, yet life insurance receives no tax break. There’s an inconsistency there, and unneeded complexity making the whole insurance arena confusing to the consumer.”

But Troup added that she remained hopeful for change.

“It’s a lobbying process,” she said. “We have to convince the Government of the need for tax concessions before we even begin the sales process. And with a new Government in power, the responses we’re getting are encouraging.”

However, not all insurers see the tax and regulatory environment as such a handicap.

Collins said that he didn’t see the tax side of insurance as the big problem some people professed it to be.

“I just don’t see it as that much of a handicap within our current system,” he said. “In the past, the biggest hurdle was finding an audience for the provision of life insurance. But we have that now, and I don’t believe tax should be the basis on which super or insurance through super should be sold.”

And Collins is not alone in his assessment, with Bourke stating the he didn’t couple the life insurance and health insurance industries.

“In the case of health insurance, there’s too much of a community impact,” he said. “So the Government is forced to offer rebates in order to attract membership.

“When it comes to super insurance, there is advice available for people if it’s wanted or required, and it simply doesn’t fit the Government’s needs to encourage greater insurance coverage.”

As a fund consultant, Mason’s view is perhaps more pragmatic.

“Look, it would be lovely to think that we could reform the tax environment in which disability benefits are paid,” he said. “And I’m sure that industry bodies like ASFA [Association of Superannuation Funds of Australia] will continue to do just that. But realistically, taxation is not a driving factor for trustees in defining their benefits.”

But challenges such as tax and regulatory environments and methods of benefits payment are the least of what the insurance industry, and through it, the superannuation industry has to worry about. Underinsurance within Australia remains a concern, and while member education seems to be the catchphrase solution, the effectiveness of that education is uncertain.

Bourke said that one only had to look at insurance take-ups to realise that the industry still had a long way to go.

“Currently, we have one fund in which many people are applying for voluntary cover online,” he said. “But when it comes to our follow-up enquiries, more than 50 per cent aren’t bothering to proceed.

“Obviously, there needs to be greater understanding and a more streamlined process in place.”

And despite a promising response to First State Super’s recent insurance mail-out, Arnott admitted that there was always room for improvement.

“We had anticipated a good response to our recent mail-out,” he said. “But the response was even better than we expected — many members had clearly read the material and actioned it.

“Nevertheless, there is still a big group of members who do not see insurance as critical,” continued Arnott. “As with any issue of importance to members, we keep repeating messages in different ways using a variety of different communication avenues.”

For Collins and Troup, making inroads into member education is about simplification and starting from a better base.

Collins is confident that members are receiving adequate information.

“But I am just as confident that that information isn’t being well understood,” he said. “And I think the solution has got to start way back in our high schools, with kids learning about credit card debt, insurance, super and so on. Because at the moment, they’re reaching the workforce and having all these options thrown at them that they simply don’t understand.”

“Members are receiving a great deal of information,” said Troup. “But at the moment, much of that information is far too confusing. For members to understand what they are being given we need to simplify, need to use common language and need to have consistency.”

Whatever the solution, Bourke admits that we’re not there yet.

“Its forefront of mind and funds and insurers are striving for it,” he said.

“2008 may not be the end of the road, but we will certainly be taking important steps.”