The advent of choice of fund a few years ago led many to predict that employer super and particularly insurance within employer super would decline. Instead, we have seen significant and ongoing growth in the channel.
The underlying reasons can be complex and both advisers and superannuation funds are playing an important role. Also, it seems the overall message about the need for life insurance is getting through.
Choice of fund
A few years ago, many people thought that fund choice would see employer super members choosing their own super provider, causing a significant fall in members sticking with the default super and life insurance provider.
In-super group insurance rates and terms are generally based on the assumption that 75 per cent of employees choose the default option and anything less could compromise the underlying proposition.
The ‘choice’ theory was that employees would choose multiple different funds and the magic 75 per cent target would not be achieved, leading to automatic acceptance limits that permit lower underwriting levels, being cancelled.
It was also tipped by some that more healthy people would look elsewhere and the underlying pool of lives remaining within a group scheme would claim more often. Again, this would put upward pressure on rates and a deteriorating cycle would begin.
The result, however, has been very different, with strong growth in employer super insurance. Underlying growth in insurance premiums through employer super, primarily corporate divisions of master trusts, has been in the order of 15 per cent per annum and premium rates have been falling.
With much of Australia unable to access life insurance advice, employer super is increasingly representing the vehicle through which middle Australia can obtain the insurance coverage they need and/or want.
This might imply that employees trust their employer’s default choice.
Strong undercurrents for growth
The 2005 Investment and Financial Services Association underinsurance study suggested that those Australians who rely on in-super life insurance had about 20 per cent of the cover they needed.
While the term ‘underinsurance’ bores some, it is true that Australia has vastly lower insurance levels than many of our international counterparts. This means that the overall market opportunities are good.
Personally, I can see people realising that that there is a need for more life insurance.
This desire for more protection will be driven by:
1. Rising levels of mortgage payments. For those who already recognise the need for insurance, higher mortgage repayments means higher levels of coverage needed to maintain the same level of protection.
2. The effect of today’s baby boom. There were more babies born in Australia last year than in any year since 1971 and an addition to a family often drives the awareness for added financial protection
3. Lower cost of insurance. Australians are living longer and, with better health and safety and more jobs, are seemingly able to return to work faster after being injured or sick. This has flowed through as falling group premiums in recent years.
4. Greater affordability of insurance paid out of performing super funds. When equity markets boom, the cost of insurance within super is actually relatively small when compared against the underlying fund growth and/or a higher fund balance. Despite recent investment falls, super balances are still well up on recent levels.
Much of this is well known but worth remembering.
The other factor is, of course, tax. The Government has introduced a number of tax changes that have made employer super a more attractive means of obtaining cover. This has seen most funds roll out longer-term income protection and terminal illness options within the fund.
The advice issue
It is pleasing to see that the Federal Government is looking at ways to simplify the existing advice model. Clearly, the existing structure doesn’t work for all.
Some advice models, particularly where insurance cover is provided through employer superannuation arrangements, are in many cases helping to fill the advice gap now.
Even if there are significant changes to the advice model, in-super arrangements are still expected to remain strong.
The drivers of higher insurance within super
Most insurance offers available within employer super funds are generally simpler than more traditional retail offerings. The existence of lower underwriting requirements can make the customer experience a lot less challenging. For larger employer groups, the majority of their staff can be covered without any underwriting at all.
For many, insurance through employer super can also represent good value for money.
The nature of a competitive market can deliver benefits both in terms of price and product for funds that outsource their insurance.
Under super legislation, trustees must act in the best interest of members and consider adequate wealth protection for their members.
To their credit, super trustees have been some of the first to act on the insurance gap message by increasing protection levels and benefits. Both industry funds and master trusts are moving in this area.
Default cover has probably been the biggest change.
Most funds now require a minimum guaranteed level of insurance cover and these minimums can sit in parallel with any benefit designed at an employer level.
Most funds allow eligible employees/members the opportunity to opt out of these minimums. This is a good outcome for members because it allows access to more appropriate levels of cover without compulsion for the cover they may not want.
Another trend has been the increased take-up of other insurance offers like total and permanent disability and income protection offers within individual employer plans.
There has also been greater take-up of voluntary increases in cover within employer super arrangements.
Some funds are also beginning to offer automatic ‘insurance upgrade’ offers that allow members to increase their levels of cover automatically and without any additional need for underwriting at specific ‘trigger events’ such as the birth of a child, marriage or the advent of a mortgage.
All up, funds are offering flexibility and a greater range of options to enable the choice of insurance that is more appropriate to each member.
What this means for advisers
For advisers who offer clients employer super, there are a couple of key questions you should be considering. These are:
1. Are levels of cover appropriate to member needs and take advantage of recent improvements in premium rates? Enhanced benefit designs can be readily encouraged and implemented.
2. Are the benefits offered appropriate?
With longer-term income protection now tax effective within super and generally available within most funds, this need can now be more specifically addressed within any employer design.
3. With rising interest rates impacting take-home pay, is it now more efficient to pay member insurance needs out of their super monies rather than elsewhere?
A point to watch is employee exits. Members may lose their entitlements during transition, especially for members moving into self-employment.
Outlook
The outlook for life insurance of all types is good. It is particularly strong for many with super through their employer super.
Australians overall are becoming more aware of the need for protection and are looking at all ways of getting that coverage. For many, employer super will remain the best option.
From the industry perspective, both master funds and industry funds are looking to compete even harder to hold and grow their funds under management, so a strong insurance offer is increasingly the key differentiator.
Andrew Boldeman is the head of group life at Tower Australia.
