A change of focus: from investment to insurance

Opponents of choice often point to lack of education as their main reason for wanting to delay its introduction. They claim that neither the financial planning industry nor the public is prepared for its implementation.

The Federal Government’s response is that the disclosure rules, laid down in the Financial Services Reform Act (FSRA), will give planners little scope for improper or illegal practices.

Consumer education, argues the Government, will get a shot in the arm from the $28 million allocated to theAustralian Taxation Officefor an education program. But how much of it is going to be directed to education on insurance?

Choice is all about long-term wealth creation. But as any good planner will tell you, wealth creation is only half the story. Without adequate protection, members will always be exposed to unforseen misfortune.

If members exercise choice of fund, what happens to their insurance cover?

Senator Helen Coonan’s recent response to the question was not terribly encouraging. She acknowledged that the insurance issue had been raised and that it was on the Government’s “radar screen”.

This gives little comfort that the Government has even considered the issue.

For the millions of fund members with high liabilities and few assets, insurance is the only safeguard and insurance under an employer’s group super plan is a cost-effective, convenient and certain way to take advantage of this safeguard.

Automatic cover currently available under group plans will come under threat as insurers become nervous about members making their own decisions about when they join and leave funds. Members choosing to stay with the fund could also be affected by loss of automatic cover and increased rates.

In the worst-case scenario, a member changing funds may lose the insurance cover they had previously, as they may not be granted cover under their new arrangements because the insurer considers them an unacceptable risk.

Currently, people can often arrange replacement cover through a continuation option before leaving their old fund.

The opportunity for members to take their cover with them when they leave a fund may no longer be available, however, as choice may see insurers removing continuation options from their policies.

In effect, choice could force members out of the comfort of group cover into the world of retail insurance.

For many senior executives, an alternative is the do-it-yourself (DIY) fund. However, if a member leaves the company fund to set up a DIY fund, the benefits of automatic acceptance will be lost and the individual will have to apply to a retail insurer for cover.

Even if the group plan survives under choice, the underlying group rates may be calculated on the basis that the insurer has no prior knowledge of the demographics of the applicant joining the plan. Bulk rates will be replaced by rates that vary by age, sex, occupation, and smoking status.

Our responsibility is not to stop members changing funds, but to make sure their decision is an informed one. That means explaining the benefits of their current insurance arrangements and the implications for themselves and their families before they walk away from them.

Rohonda Virtue is principal, group risk practice withAon Consulting .