CHAPTER 9
INSURANCE
Introduction
9.1 Many superannuation funds, particularly industry funds, provide life
insurance cover as part of the superannuation arrangements. While there
is no requirement that insurance be provided as part of superannuation,
it is nonetheless very common practice. Further, it is apparently regarded
as a very desirable feature by both employees and employers, particularly
in high risk occupations where cover is either prohibitively expensive
or unobtainable.
9.2 Several witnesses raised concerns about the implications of the choice
of fund proposal for life insurance associated with superannuation. There
are two distinct areas of concern:
- ending of automatic cover; and
- gaps in cover in the 56 day period between when an offer of a new
fund is made and acceptance.
9.3 The possibility that persons exercising their rights to choose a
new fund might inadvertently leave themselves without cover was a matter
of considerable concern both to a range of witnesses and to members of
the Committee. As one witness observed, insurance may be the great `sleeper'
issue arising out of the choice of funds initiative. It requires the careful
attention of Government and industry.
Insurance associated with super
9.4 Employees in industry funds frequently receive insurance cover as
part of their membership of the fund. In high risk occupations in particular,
this is viewed as an important safety net arrangement. This is because
people in such industries cannot buy insurance or find it prohibitively
expensive.
9.5 Ms Helen Hewett, the fund secretary of C+BUS, explained the situation
for people in her fund which is a fund covering the building and construction
industries.
...we have got almost 300,000 members and almost 19,000 employers that
participate in our fund... It is seen as a fairly high risk industry
and, before C+BUS came into existence in 1984, most employees in these
industries were not able to buy insurance. If they could buy it, if
they could afford it, they usually found that pre-existing injuries
- such as a knee injury, a neck injury or a back injury - were excluded.
So effectively they had very little in the way of security. [1]
9.6 Ms Hewett and a number of other witnesses advised the Committee that
insurance has been a very important part of the superannuation benefit,
for both employers and employees.
We think that it is important to look after members throughout their
working life by providing them with the security that insurance gives,
and to also look after them in their retirement and make sure that their
families are adequately provided for. [2]
9.7 Providing life insurance through superannuation has a number of significant
advantages for employees. The major advantage is low cost. This is achievable
because insurers assess risk on a group rather than an individual basis.
As a result, employees can be covered from the first day of their employment,
with full cover in the event of injury or death on the job.
Automatic cover
9.8 While insurers have provided automatic cover in the past, this will
not necessarily be the case under the choice of fund arrangements. Insurers
are often prepared to offer immediate cover where there is certainty that
the employee's contributions will be directed to a particular fund, for
example under an award arrangement. Mr Ian Silk of the Industry Funds
Forum explained:
Most of them are currently covered by industry funds, because we, that
is, the fund, take on the liability in most cases the moment the person
is employed, notwithstand_ing that they have not filled out an application
form and it has been received by the fund. The fund takes that on in
good faith because that employer's employees are members of that fund.
[3]
9.9 Introducing choice of fund injects an element of uncertainty into
the situation that will affect the previously automatic provision of insurance
cover. An employee with either unlimited choice or a choice of four funds
may choose any one of those funds. As there is no certainty that contributions
will be forthcoming, the insurer is unlikely to be willing to provide
automatic cover, as Mr Stephen Gibbs of the Australian Institute of Superannuation
Trustees explained:
Many funds have arrangements with insurers that guarantee coverage
from day one, even though no contributions have been received, because
it is certain that they will be. In a choice environment, it is no longer
certain that somebody will become a member, and whether the insurer
will in effect provide that universal coverage from commencement of
employment is something a trustee would have to review. [4]
9.10 Ms Helen Hewett of C+BUS provided similar evidence to that of Mr
Gibbs concerning the apparent unwillingness of insurers to provide automatic
cover until a premium is paid. She cited a well known industrial accident
in Melbourne exhibiting the pitfalls of gaps in insurance cover:
There have been lots of injuries and cases - and there was one very
well-known case in Melbourne a few years ago - where there was somebody
killed and a number of building workers injured. That was day one of
the project and those people were new employees. They were covered by
insurance, but we are concerned that we will not have the ability to
do that because effectively people will be able to select against us.
Our insurer has said that it would be very difficult for them to maintain
the current policy conditions under a choice of fund environment and
that they would not be able to cover people until the premium was received.
[5]
The insurance gap
9.11 When circumstances require an employer to offer an employee choice
of fund, they have twenty eight days in which to make the offer. On receiving
the offer, the employee then has up to twenty eight days in which to accept.
Up to fifty six days may elapse before an employee becomes a member of
the fund.
9.12 The Committee received evidence from a wide variety of witnesses
expressing concern that employees may unwittingly be left without insurance
cover in the period before the offer is made, until acceptance.
9.13 Further, employees exercising fund choice may, if not adequately
advised, be unaware of whether they will be insured under their chosen
fund, or, if their cover will be restricted, because of pre-existing injuries
for example.
9.14 Mr David Connolly, Director, Superannuation and Govern_ment Relations,
Phillips Fox, saw the insurance gap as `one of the biggest problems that
is faced'. He advised the Committee that access to some insurance cover
is of critical importance because `in the event of somebody going under
a truck or having to access TPD cover', an adequate insurance payment
meant the difference between dependents having to rely on the social welfare
system indefinitely, or having some financial independence. [6]
9.15 Mr Connolly explained it was for that reason he proposed a universal
and a compulsory minimum level of insurance cover in the original coalition
policy. He expressed disappointment that his proposition had not been
implemented by the current Government:
I am saddened that that part of the policy has not apparently been
taken up - I might add that I think it is the only part of the policy
that has not been - and I am saddened to see that the industry representatives
also do not support that proposition. [7]
9.16 Mr Tony Wells, Director of Superchoice Software, graphically illustrated
the uncomfortable situation that employers may unwittingly find themselves
in as a consequence of an employee not being covered in the offer-acceptance
period:
If it happened that an employee were disabled or died in the middle
of the fund choice procedure, and he fell between two insurance chairs
in the middle of all of this, and his widow were to front up to the
employer and say, `When I read the last member booklet that Fred got
at the last balance date, he was insured for $180,000. Where is the
money? I have got three starving kids,' his employer would say, `I am
sorry, but he went through this fund choice thing and he has not got
any cover.' That would be a horrible situation, to be avoided at all
costs. It could happen, and it could happen through either misunderstanding
or even insurance risk underwriting delays that occur or the 28-day
delays happening with fund choice, and so on. [8]
Possible solutions
9.17 The Committee received a number of alternative suggestions for addressing
the insurance issue. Broadly, these fall into the following categories:
- "Stand alone" insurance;
- "Back end" insurance; and
- Disclosure rules.
"Stand alone" insurance
9.18 The Committee received several suggestions as to how "stand
alone" insurance might be provided to ensure employees remained covered
when exercising their rights to choose a new fund.
9.19 Mr David Connolly suggested it may be possible to allow an employer
to establish a separate stand alone fund which would be, in terms of the
law, a superannuation fund which would pay out the premiums for the insurance
cover, irrespective of the superannuation component. He said however,
that this proposal `has problems of administrative costs'.
9.20 Mr Tony Wells of Superchoice Software suggested employers should
`revisit their whole superannuation insurance arrangement, pick it all
up and dump it into a stand alone group risk master trust'. This suggestion
is similar to Mr Connolly's, as it separates out the superannuation and
insurance functions. As such, it shares the same difficulties.
9.21 Mr Graham Bird, Managing Director of Graham Bird and Associates,
told the Committee employers had asked him whether it would not be simpler
for the employer to arrange death and disability types of cover as an
employee benefit rather than as a superannuation benefit. Mr Bird told
the Committee that while he thought this suggestion has merit, employers
who used this strategy would find the premium paid by the employer would
be regarded as a fringe benefit and therefore subject to fringe benefits
tax.
"Back end" insurance
9.22 Mr Kevin Casey of AMP Insurance considered that `Ultimately, the
market will probably come up with a solution' to the insurance problem.
He advised the Committee that one of AMP's methodologies was to provide
insurance cover that continues for a period of 30 or 60 days after a person
leaves a fund. Employees in funds using Mr Casey's method of providing
cover should therefore have continuity of insurance cover when they switch
funds.
9.23 Mr Casey emphasised:
If you can do it at the back end, you can do it at the front end. That
does not mean to say it is a matter of magically waving the wand and
it is there. There are certainly fairly detailed actuarial and underwriting
calculations and considerations in all of that. There are possibilities
which the industry is already starting to think about... [9]
Disclosure
9.24 Mr Steve Partridge of William M. Mercer Pty Ltd, suggested `the
only real answer to that is very effective disclosure of death and disability
benefits and the consequences of exercising choice.' Under Mr Partridge's
suggestion, there would be a requirement, presumably incorporated in key
features statements or other educational material, that clearly warned
employees to be aware of the consequences of changing funds.
9.25 Mrs Louise Matthews of Coopers & Lybrand offered a similar opinion.
She advised the Committee that disclosure requirements should cover a
number of issues in respect of insurance cover. These included:
- the level and the nature of the insurance cover being provided;
- all of the contractual obligations that are bound into that insurance
cover, such as whether there are any medical evidence requirements if
a person changes funds;
- whether cover is to be automatically provided and the level of that
cover;
- the premiums of the cover, if met by the employee; and
- if an ability exists to transfer existing cover to a new fund, or
to the individual, and the terms of effecting such a transfer.
9.26 Mrs Matthews concluded this was `pretty important' for older workers,
and those in poor health or in high risk occupations. She warned:
If they are not aware of changes to automatic acceptance levels, for
instance, they could possibly lose the amount of insurance cover or
pay a greater loading on their insurance premiums than they would ordinarily
if they had stayed with their original fund. [10]
9.27 Evidence from Departmental witnesses appears to indicate that the
Government's preferred approach to this issue is to rely on disclosure
to ensure that employees who change funds are aware of the consequences
of their actions and the insurance implications that may result. Mr Michael
Monaghan assured the Committee:
...we would certainly see that as being an important educational issue
and an important thing to bring to employees' attention when they are
making a choice. They now end up in a fund through no choice, sometimes
with death and disability cover and sometimes not. So it is certainly
something that they need to know about when they do make a choice. [11]
Footnotes
[1] Evidence, p. 178.
[2] Evidence, p. 178-179.
[3] Evidence, p. 45.
[4] Evidence, p. 116.
[5] Evidence, p. 179.
[6] Evidence, p. 254.
[7] Evidence, p. 254.
[8] Evidence, p. 80.
[9] Evidence, p. 357.
[10] Evidence, p. 276.
[11] Evidence, p. 430.
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