Group life insurance

Introduction

7.1                  This chapter considers issues associated with group life insurance, including opt-out requirements, member awareness of cover, the impact of premiums on small super balances, the continuing deduction of premiums from a member's account despite that member no longer qualifying for cover, and duplicate insurance.

Opt-out versus opt-in requirements

7.2                  The Superannuation Industry (Supervision) Act 1993 (SIS Act) requires MySuper members to generally be offered life and TPD cover on an opt-out basis.[1]

7.3                  Many submitters and witnesses supported retaining the present opt-out system.[2] For example, both the Australian Institute of Superannuation Trustees and Industry Super Australia argued that the opt-out model has helped to combat underinsurance in Australia.[3]

7.4                  The Association of Superannuation Funds Australia (ASFA) submitted that the evolution of group insurance over the past 20 years has seen up to 92 per cent of the working population afforded some type of insurance coverage that would otherwise not be in place. ASFA argued that:

While member engagement with insurance in superannuation is typically low, some ASFA members have reported to us that up to 15 per cent of members 'opt-up' and increase their default level of insurance cover, whilst less than 5 per cent opt out and cancel their cover. This behaviour indicates that fund members associate a high degree of value and benefit with insurance in superannuation and that for many individuals increased levels of cover are required to meet their needs.[4]

7.5                  Similarly, the FSC submitted that the majority of Australians would not have adequate cover if it was not for their default, opt-out superannuation fund arrangements. The FSC argued that the superannuation system has proved to be the most efficient and effective means of providing an affordable level of insurance cover to almost all working Australians. Over 90 per cent of the working population are afforded some type of insurance cover that would not otherwise be in place, particularly for those unlikely to have considered their insurance needs.[5]

7.6                  In light of the coverage afforded by an opt-in model, the FSC raised the following concerns about an opt-in model:

In contrast, where there is an opt-in arrangement significantly fewer people are likely to be covered. The average opt-in rate is very low for voluntary arrangements of insurance cover, such as income protection. An opt-in arrangement would result in more expensive insurance costs potentially making cover unaffordable for many Australians who are already covered today.

Many Australians, for example those working in heavy industry or suffering from a pre-existing medical condition, may not be given access to cover under an opt-in arrangement.[6]

7.7                  Berrill and Watson Lawyers submitted that while improvements need to be made to group life insurance, it has operated as a very efficient means of delivering life insurance to Australians. Noting that the proportion of total life insurance held within superannuation funds was 71 per cent for death cover, 88 per cent for TPD cover, and 59 per cent for income protection cover,[7] Berrill and Watson Lawyers argued that any significant movement away from the current opt-out model would have huge adverse implications for the availability of affordable life insurance and would drastically reduce the amount of Australians who have life insurance.[8]

7.8                  The Australian Lawyers Alliance (ALA) submitted that opt-out cover in superannuation is indispensable for retaining high levels of life insurance cover for Australians. The ALA did acknowledge, however, that both the products being offered to consumers, and the claims handling processes being used by insurers, require improvement in order to balance consumer rights with market viability.[9]

7.9                  Nevertheless, despite widespread support for the current opt-out system in group life insurance, several submitters and witnesses raised specific concerns about various aspects of the opt-out system, including some of the issues discussed in the following sections.

Making it easier to opt out of group life insurance

7.10             The SIS Act includes a requirement for trustees to allow MySuper members to elect not to receive (opt out of) life insurance relating to permanent incapacity benefits or death benefits in section 68AA:

(5) Each trustee of a regulated superannuation fund must ensure that each MySuper member of the fund may elect either or both of the following:

1. that permanent incapacity benefit will not be provided to the member by the fund;
2. that death benefit will not be provided in respect of the member by the fund.

(6) The trustees of a regulated superannuation fund may require that MySuper members who wish to make an election in accordance with subsection (5):

1. must make the election in relation to both permanent incapacity benefit and death benefit; or
2. must make the election in relation to death benefit if they make the election in relation to permanent incapacity benefit.[10]

7.11             AMP informed the committee that customers can call AMP to opt out of group insurance and that AMP is investigating ways to make that an easier process online.[11]

7.12             Treasury informed the committee that the government has tasked APRA with making it easier for MySuper members to opt out of automatic life insurance policies. Treasury noted that there is no guidance to funds on how to implement the requirement to allow customers to opt out. Treasury also noted that there were currently no regulatory impediments to trustees making it easy for consumers to opt out. Treasury therefore suggested that:

The sense is maybe that trustees make it very easy to get more insurance, but very hard to opt out of insurance.

[I]deally you would be able to go onto the fund's website and you would be able to opt out by pressing a button, like you could press a button now to apply for additional life insurance.[12]

7.13             The draft Insurance in Superannuation Code of Practice would require trustees to make the process of cancelling, or opting out of, automatic cover straightforward and transparent for members. The draft code indicates that members should be able to cancel through a fund's website, over the phone or via email. The final version of the ISWG code appears to have retained most of these features.[13]

Inadequate member awareness of cover

7.14             ASIC pointed out that superannuation fund members may often be unaware that they have insurance cover, how to claim on a policy, or that the cover may change or even cease in certain circumstances.[14]

7.15             Furthermore, members may receive inconsistent information as a result of trustees relying on data from employers. This issue is potentially exacerbated when a superannuation trustee changes their insurance arrangements, which can occur every three years. This can result in fund members not being aware of the details of their current cover, and of any relevant changes to the claims process.[15]

7.16             ASIC indicated that it is undertaking a review of the information provided to consumers by superannuation trustees in relation to the underlying insurance policy entered into by the insurer and the superannuation trustee.[16]

7.17             CHOICE raised concerns about how information on group life insurance is presented to consumers, submitting that application forms are confusing and do not provide clear information about the cost of default cover. Instead, consumers are directed to supplementary documents, such as insurance guides and product disclosure documents. CHOICE indicated that these documents often display the cost for units of cover which may differ across age groups, requiring consumers to conduct mathematical calculations to discover the cost of life insurance premiums. CHOICE argued that because such a small percentage of consumers read and understand such documents, it is unrealistic to expect that consumers are making informed decisions when deciding whether to opt-out of group life insurance.[17]

Duplicate group life insurance accounts

7.18             During the inquiry, concerns were raised about the extent of duplicate life insurance policies in group superannuation resulting from people moving between occupations. The committee notes that, in some cases, people may deliberately choose to maintain multiple group life insurance accounts. However, evidence to the committee also indicated many people are unaware that they have group life insurance and, potentially, multiple group life insurance accounts.

7.19             The Australian Taxation Office (ATO) data indicates that 40 per cent of people have more than one superannuation account, with 15 per cent having three or more. Thirty per cent of people under 25 have more than one superannuation account. The greatest proportion of multiple superannuation accounts is around 47 per cent for 36 to 50 year olds.[18]

7.20             CHOICE submitted to the committee that modelling indicates that Australian consumers are potentially losing over a billion dollars each year due to duplicate insurance through superannuation. CHOICE suggested that younger consumers in particular are paying for insurance which does not match their needs and is eroding their retirement balances:

Using current ATO figures on the number of duplicate accounts, up $1.96 billion across the economy every year is potentially lost due to duplicate insurance, an average of $131 per account holder. Modelling from the Financial System Inquiry found that removing duplicate accounts could increase superannuation balances at retirement by around $25 000 and retirement incomes by up to $1600 per year. About two thirds of this cost or $16 000 was due to duplicate insurance. This is clearly not an efficient use of resources, with fund erosion due to fees ultimately leading to an increased impost on the aged pension.[19]

Negative impact on superannuation balance for casual or intermittent workers

7.21             When a member ceases employment, the default payment of insurance premiums will generally continue until an account balance limit has been reached. This limit, set by the trustee, represents the point below which the trustee considers benefits are being unnecessarily eroded by the premium payment. Fund members with small balances may find that their superannuation balance has fallen below the limit and may not always be advised or aware that their cover is ceasing as a result.[20]

No cover despite premium payments

7.22             ASIC informed the committee that, in some instances, consumers are charged premiums when they no longer have cover. For example, cover may cease after a person has left a particular employer. Yet, if the notification from the employer is not sent to the trustee (noting that sometimes it is not clear whether a person has 'left' employment, particularly for casual workers), premiums continue to be deducted from the member's account balance. ASIC observed that a member could reasonably infer from this that they have cover. However, the fact that the member has left the employer may only become known when a claim is lodged. While premiums may be refunded, the claim is likely to be declined and the consumer is left without cover.[21]

7.23             A similar situation arises when non-contribution is the employer's failure to make compulsory superannuation guarantee payment, which can then also lead to the member not having insurance cover they may require and believe they have such cover, not realising their superannuation is not being paid.

7.24             On the other hand, there are policies that do not cease after a person has left a particular employer. If the policy under the superannuation that a worker had while at a previous employer does continue, then it may provide coverage where a new policy would not. An example would be the return of a cancer after a change of employer. The exclusion for pre-existing conditions may apply for the new policy, meaning the worker would not be covered, but if they have a policy in a still operative earlier account, that may cover them.

Treasury initiatives

7.25             During the inquiry Treasury was progressing three processes that are relevant to life insurance and superannuation. The first was a government bill, introduced in September 2017, to amend the SIS Act to improve accountability and members' outcomes in superannuation including MySuper. The amendments propose a new law to require trustees to make an annual determination, in writing, as to whether the financial interests of the members in the MySuper product are being promoted. The trustee is required to have regard to a range of factors including:

• whether the insurance strategy for the MySuper product is appropriate to those beneficiaries; and
• whether any insurance fees charged in relation to the MySuper product inappropriately erode the retirement income of those beneficiaries.[22]

7.26             The Senate Economics Legislation Committee recommended that the bill be passed.[23]

7.27             Treasury also pointed to two further initiatives. In the first, the government has tasked APRA with making it easier for MySuper members to opt out of automatic life insurance and TPD policies. In the second, the Productivity Commission is currently undertaking the third stage of its review of the competitiveness and efficiency of the superannuation sector. The terms of reference for this review explicitly require the Productivity Commission to examine the appropriateness of current arrangements for insurance in superannuation.[24]

Supermatch

7.28             Since 2015, the Australian Tax Office (ATO) has provided an online system called Supermatch2 which provides trustees with information to assist with consolidating members accounts. Prior to 2015, an earlier version of Supermatch was available. Trustees are able to submit single or batch requests, and Supermatch2 will provide information on members accounts including:

• the name of the superannuation fund;
• the member account number;
• the member identifier and full name of member;
• the tax file number of the member;
• an insurance indicator (not for new member accounts);
•   a defined benefit indicator (not for new member accounts);
• the activity status of the account;
• indicators if the ATO held superannuation; and
• account balances.[25]

Committee view

7.29             Evidence to the committee from a broad range of stakeholders strongly supported the opt-out model for life insurance within group superannuation, particularly as a means of addressing the problem of under-insurance.

7.30             Nevertheless, concerns were raised in relation to the opt-out model, particularly for those with low super balances such as low-income earners, women, and young people. The mechanism for opting out of life insurance held within group superannuation does not appear to be straightforward.

7.31             The committee welcomes moves by the government to task the Australian Prudential Regulation Authority (APRA) with making it easier for MySuper members to opt out of automatic life insurance policies. The committee is reassured by the Insurance in Superannuation Code of Practice which would require trustees to make the process of cancelling, or opting out of, automatic cover straightforward and transparent for members including via a fund's website, over the phone or by email.

7.32             However, the committee is firmly of the view that trustees should move swiftly on this matter and institute an online system that could be as simple as an opt-out button on the fund's website. The committee is puzzled by how long it has taken to institute what would, on its face, appear to be a straightforward reform. The committee therefore considers that further delay in simplifying the opt-out mechanism is unacceptable.

7.33             Beyond simple mechanics, however, evidence to the inquiry revealed that duplicate life insurance held within group superannuation accounts is a substantial drain on superannuation balances with significant adverse consequences for retirement incomes, particularly for those with low super balances and/or not engaged with their accounts. Consumer groups told the committee that up to $1.96 billion is lost each year through duplicate life insurance accounts held in group superannuation.

7.34             By contrast, it is estimated that superannuation balances at retirement would rise by around $16 000 in total if duplicate insurance accounts were removed. This would be a significant boost to retirement savings. Women, low-income earners and young people would benefit in particular as they are disproportionately adversely affected by insurance premiums eroding their superannuation balances.

7.35             The committee views the current dearth of action by trustees and life insurers to fix the problem of duplicate insurance within group superannuation as completely unacceptable given that systems already exist which can be used to remedy the matter.

7.36             The committee considers that the Supermatch2 system is likely to already give superannuation trustees access to most of the information necessary to assist members in resolving problems, including duplicate superannuation and life insurance accounts and the associated duplication of fees and premiums.

7.37             Given that the Supermatch systems have been available to trustees for some years, the committee is particularly concerned that trustees and life insurers have been profiting from fees and premiums and have not used the already available resources to assist members to resolve issues including consumers having:

• life insurance that they unaware of;
• duplicate accounts for which duplicate fees and premiums have been taken;
• accounts with small balances that may be eroded by premiums; and
• accounts with life insurance upon which, in all probability, the member would be unable to make a successful claim.

7.38             Given both the inaction by trustees and life insurers, and the fact that 40 per cent of people have more than one super account and therefore potentially a similar number of duplicate life insurance accounts, the committee considers that urgent action is required to inform account holders of the status of their accounts.

7.39             The committee supports the general principle that buyers should be aware and should make reasonable efforts to inform themselves. However, the committee considers that when fund members, by virtue of the current opt-out system, automatically make superannuation contributions and related premium payments, it is inexcusable for those trustees entrusted to act in the members' best interest to collect duplicate fees and premiums when they have ready access to the relevant information and would be in a position to inform their members.

7.40             The committee notes that the final version of the Insurance in Superannuation Voluntary Code of Practice requires complying life insurers to contact automatic insurance members with balances under $600, nine and 13 months after their last contributions.[26]

Recommendation 7.1

7.41             The committee recommends that trustees that have access to information on accounts that are duplicate, have low balance risks or lack contributions, should be required to contact members annually to inform them, in summary form and in plain English, of:

• the status of their accounts; and
• whether their insurance policy is still providing coverage.

7.42             The committee further recommends that, in addition to annual notification, trustees should be required to contact members in a timely manner when trigger points such as low balance risk are reached.

7.43             The committee observes that even if the government were to immediately implement the above recommendation, it may take some years to resolve the issues. In the meantime, fund members would continue to lose significant sums of money, particularly women, young people and low-income earners, and trustees and life insurers would continue to make improper gains.

7.44             The committee notes that taxpayers are able to use their myGov account to check the status of their superannuation accounts, including:

• details of all superannuation accounts;
• finding lost superannuation held by superannuation funds;
• finding ATO-held superannuation—if the government, superannuation funds or employers are unable to find an account to transfer the superannuation to;
• combining multiple superannuation accounts by transferring superannuation into a preferred superannuation account; and
• checking for the existence of life insurance held through superannuation.[27]

7.45             The committee is concerned by the evidence presented during this inquiry that many people are either unaware that they hold life insurance accounts through their superannuation, or unaware that they can check on such accounts through the myGov system.

7.46             The committee therefore considers that it would be appropriate to inform people of the information held by the Australian Tax Office on individuals' superannuation and life insurance accounts with the aim of improving member engagement.

Recommendation 7.2

7.47             The committee recommends that superannuation funds should be required to inform the Australian Tax Office of the type and status of the insurance that is held for the benefit of the member for each of their superannuation accounts.

Recommendation 7.3

7.48             The committee recommends that, when it sends out individual annual tax assessments, the Australian Tax Office also provide a statement of superannuation and insurance, subject to system capacities and cost effectiveness, including information on:

• the number of superannuation accounts held;
• the number of life insurance accounts held through superannuation; and
• the insured's right to seek information from the superannuation trustee about the balance, and the continued coverage or otherwise of any insurance policy.

7.49             The committee notes that the ASIC's MoneySmart Website[28] includes useful information on a range of issues that consumer should be aware of. However, duplicate insurance accounts held within group superannuation does not feature on ASIC's website.

7.50             Given the scale of the problem and the lack of action from superannuation trustees and life insurers supplying the group superannuation market, the committee considers that there is a need for a public information campaign to raise awareness of these matters.

7.51             To this end, the committee considers that it would be appropriate for the industry to fund a prominent media advertising campaign to alert consumers to the prevalence of duplicate life insurance held within superannuation accounts, the negative impacts that this can have on superannuation account balances, and the mechanisms for removing duplicate insurance policies.

Recommendation 7.4

7.52             The committee recommends that the life insurance industry fund a prominent media advertising campaign, particularly aimed at those most vulnerable to duplicate accounts and fee erosion, to alert consumers to:

• the prevalence of duplicate life insurance accounts held within group superannuation;
• the negative impacts that duplicate life insurance accounts can have on superannuation account balances;
• the mechanisms for removing duplicate insurance policies within group superannuation; and
• the importance of seeking specific advice before making changes, if you have any pre-existing conditions.

Recommendation 7.5

7.53             The committee recommends that the government appoint the appropriate existing body to undertake an immediate review of all superannuation trustees to determine their compliance with existing obligations under the Superannuation (Industry) Supervision Act 1993, including section 52(7)(c) covenants, 'to only offer or acquire insurance of a particular kind, or at a particular level, if the cost of the insurance does not inappropriately erode the retirement income of beneficiaries'.

Recommendation 7.6

7.54             The committee recommends that, the Australian Government consider legislating to protect the retirement savings of members with low account balances and members who do not receive any value from default insurance.

Recommendation 7.7

7.55             The committee recommends that the Australian Government consider legislating to require life insurers and superannuation funds to provide regular updates to policyholders of the level, type, extent and cost of life insurance cover that they have using a standard form disclosure format, enabling them to compare with other funds or, in the case of superannuation, make them aware that they have access to life insurance.

7.56             The committee notes that this inquiry has focused on group insurance within the superannuation environment. However, it is important to recognise that group insurance also exists outside superannuation and should be investigated at some future time.