Underinsurance

Sperannuation trustees may soon have to make some tough decisions if they are to ensure their members are not caught up in the national underinsurance trap.

That gap, the difference between how much life insurance Australians have and how much they would need to protect their financial wellbeing, is now estimated at around $1,350 billion.

When basic insurance was introduced as a basic component of the Super Guarantee Levy (SCG) it was pegged at $1 a week. The SCG at that time was 3 per cent. Today, it is 9 per cent.

Unfortunately, despite that three fold increase in the SCG, and accounting for inflation, the average default insurance cover offered by many super funds has not changed.

Where $1 a week in 1986 might have bought a reasonable amount of life cover, today it buys barely $50,000 at a time when the average mortgage is in excess of $200,000 and personal indebtedness is at an all-time high.

You only have to look at the graph of insurance contributions vs super contributions to see the decline. Whereas 20 years ago insurance contributions were around 9 per cent of total super contributions, now they are barely 1 per cent.

Let’s look at a few more of the statistics around the Australian underinsurance problem.

There are 5.3 million families in Australia with dependent children living, in mostly a mortgaged, home. It is estimated that any insurance cover they have, mostly through super, is only about 20 per cent of their needs.

Around two thirds of families do not have enough cover to replace a year of lost income.

And while super savings are now said to be worth about $800 billion, the underinsurance gap, as identified earlier, is now estimated at more than $1.3 trillion — $500 billion greater than the total super savings pile.

You can therefore put the insurance gap at the top level of $1.3 trillion, or the lesser level accounting for super savings of $500 billion. Still big either way.

It is a sad fact, however, that most people when asked if they have life or personal insurance cover answer yes — it is in their super. But as identified, it is $500 billion short.

This raises the challenge facing many trustees — and a possible tough decision.

Do they allow the underinsurance issue to continue to exist or do they do something about it. And, if it is the latter, what?

Perhaps at the most radical end of the suggestion chain would be for insurance to be taken completely out of the insurance environment.

While this might address the concerns of the trustees, there are no guarantees that it would help deal with the underinsurance problem unless matched with a significantly upgraded effort by the insurance industry.

The trustees would still have a responsibility to ensure superannuation members had access to sound and independent insurance advice.

Tower’s Jim Minto has been very vocal about the underinsurance problem in Australia and has identified failures of the industry in the past to sell the concept and provide understandable products as being key drivers.

Those drivers still exist.

Another option was suggested by Tower earlier this year to the Government when it was looking at setting in-super insurance contributions as part of its super choice regulations.

At that time Tower recommended going back to the start of the SCG and the $1 a week basis, tripling to account for the increase in the SCG, and then adding an inflation factor.

Given the growth in average weekly full time earnings in that period along with the national increase in wealth, that is unlikely to have been a significant burden to bear. Then there are the social benefits that would have been gained by helping to close the underinsurance gap.

The good news is that the group life insurance market, mostly through superannuation, is a growth industry.

In the recent past, it has been growing at a rate of around 15 per cent per annum. This is likely to attract new competitors to the market. New entrants are coming into the group risk market now and some players, who have perhaps ignored it in the past, are showing new signs of interest.

This presents another emerging ‘tough’ decision for trustees — who to put their group risk or in-super insurance with.

Ultimately, they should be looking for a provider who gives them active and ongoing support. The insurer must be able to handle a large volume of underwriting and claims applications. They must be able to provide the trustee with the assurance that they know the market and can give them a package suitable for their members.

And in the end, the trustee must know that the insurer is committed to the market. That commitment therefore must go to providing sustainably priced products, product information, and client service.

Stuart Rowe is national sales manager, group risk, Tower Australia.