Insurance in Super – a partial fix for under-insurance

Posted on November 4, 2010
Filed Under Financial Roundtable Report Series, Funds Management & Superannuation, Insurance, Media Release, Publications | Leave a Comment

ACFS releases roundtable report on “Super: Implications for the Life Insurance Industry”

The growth of superannuation has been significant for the structure of the life insurance industry, with most super funds offering standardized life and TPD insurance as automatic parts of their superannuation plans. For the life industry, it has meant an increase in group policies sold to super funds relative to individual policies, and has had implications for the levels of coverage and distribution mechanisms.

Minimum levels of life insurance must be offered in employer-sponsored superannuation funds under the SIS Act which governs fund trustees. The provision of life, total and permanent disability (TPD), and income protection insurance cover through super funds is now a big business for insurers. With an aging population, and changes to remuneration for financial advisers, it is likely to become a more important business for financial planners within and outside of superannuation.

Australian Centre for Financial Studies (ACFS) Director Prof Deborah Ralston states that “insurance advice is one area where licensing of financial advisers may have had unintended consequences”. For instance, most advisers and accountants who provide advice and administrative services to self-managed super funds are either focused on the investment and tax aspects. or on the insurance product itself. Tailoring for the life stage or risk tolerance of individuals may not be happening. Or if it, it may be that opportunities for tax deductibility (against contributions tax) are going begging.

Ralston noted that “insurance coverage is wider than it would be otherwise without embedding it in super arrangements but there are significant public policy issues involved in the way insurance is offered in Australia. Issues include a significant lack consumer engagement, insufficient focus on insurance in financial advice, and under-insurance among those without superannuation.”

The ACFS discussion paper notes that in employer sponsored funds, trustee determinations about the default level of coverage of their funds are important given the “behavioural biases which tend to lead to individuals not shifting from a default option”. A tripling of the default level by one scheme, while also giving members the right to opt out, was reported to have seen only one per cent opting out.

The ability of super funds to now provide financial advice to members is an opportunity for selling insurance. In so doing it raises questions about incentives and the nature of appropriate fee/commission relationships between the fund, insurance company and member. In not-for-profit funds any commissions will flow to the membership pool at large.

ACFS Research Director Prof Kevin Davis noted that

“With the impending ban on commissions from financial product providers, but an exemption from that ban for life insurance products, there may be enhanced interest shown by advisers in life insurance products.”

Because pricing of individual risk products is critically dependent on the personal characteristics of the individual mechanisms for assisting individuals (or their advisers) in choosing between competing supplier offerings are important. “Whether this will be best served by insurance brokers or though web-based portals enabling individuals to seek bids from participating suppliers is another question” Prof Davis added.

Davis concludes that “income protection and TPD insurance are now sufficiently important to warrant being considered a compulsory element in superannuation alongside life insurance.” He adds that “so too may be trauma insurance”.

The focus of the ACFS Financial Roundtable Report on implications of Superannuation for the Life Insurance Industry is beyond Chapter 5 in Part Two of the Australian Super System (Cooper) Review: Insurance in Superannuation.

It identifies a range of issues worthy of further study:

• Is it significant that major life offices now have a more of their asset holdings in superannuation liabilities (wealth management) rather than in insurance?
• Given the different age composition of super funds, how optimal are current default insurance options?
• Whether the current structure of administrative arrangements and responsibilities between super funds and insurance companies in identifying member deaths and initiating claims payments is optimal.

View full report

The Financial Roundtable Report Series assembles the expertise and thoughts of leading financial services individuals on relevant topics. Through the use of roundtables, ACFS enhances its thought leadership role by facilitating discussion among academics, industry practitioners, policymakers and regulators.  This discussion contributes to the public policy debate and identifies further research areas. More in this series…

Media contact:

Professor Kevin Davis
Research Director, Australian Centre for Financial Studies and
Professor of Finance, University of Melbourne
W: +61 3 9666 1050
Mob: +61 409 970 559
info@australiancentre.com.au

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Long-term Disability Care & Support Scheme – Involve private providers

Posted on September 8, 2010
Filed Under Financial Roundtable Report Series, Inquiry Submissions, Insurance, Media Release, Policy, Publications | 2 Comments

ACFS releases submission to Productivity Commission

A national insurance scheme for long-term disability care and support is a laudable concept but the devil is in detail of design and implementation. While an ill-designed scheme may be costly, having no scheme may prove more costly in the long term.

Much can be learned from existing schemes and useful mechanisms imported from existing products. Disability is a hidden cost of life for a large minority, and at some stage in retirement a major cost for many. Insurance products and schemes can help.

A priority of the new Government will be to address the economic and social costs of disability. An aging population, longer work hours and consequent pressures on carer families and community networks are likely to mean growing pressure for action. While Australia’s social security and health care systems provides universal services based on need, there is currently no similar entitlement to disability care and support services.

The Productivity Commission has been requested by Assistant Treasurer Senator Nick Sherry to undertake an inquiry into a National Disability Long-term Care and Support Scheme. The Inquiry assesses the costs, cost effectiveness, benefits, and feasibility of such a scheme.

Australian Centre for Financial Studies (ACFS) stated its broad support for the objectives of the Inquiry.  ACFS Director Prof Deborah Ralston noted that “disability care and support services are a vital part of our social fabric” and that “disability insurance is a key component of society’s approach to dealing in a just fashion with the economic and social costs that disability creates”. ACFS assesses that the current role of insurance-based compensation for disability is under-estimated by both the community at large, and also the financial sector.

ACFS has established a Research Reference Group of academics, practitioners and regulators for Insurance. It has a key objective of building a dynamic insurance research agenda for academic staff and students to be of direct relevance to industry and government. Impetus for this ACFS submission came out of that group.

ACFS focused its submission upon existing and potential insurance schemes and addressed the following specific questions:

1. What is the range of current disability insurance schemes in Australia and what lessons can be learnt from the experiences of those schemes (including underinsurance, claims experience)?
2. What impediments are there to insurance schemes for dealing with particular types of disability claims?
3. What relationships between insurers as payers of claims and providers of disability support services are appropriate? Fault vs. No fault; Equity issues – outcomes vs. causes; Ongoing care costs; Compensation amounts; and Insurer Solvency
4. What is the appropriate role for Government funding versus private insurance in dealing with disability coverage? Common Law Settlements vs. Insurer payouts; Structured settlements; Special Disability Trusts; Pension Age
5. What innovations in privately provided disability insurance schemes should be promoted/supported by Government and how?

More questions than answers remain. Some conclusions can be drawn.

• A lesson from failed schemes is that it is better to fail fast and fail small. There may be value in any national scheme being developed and refined in proto-type on a smaller scale e.g. in one state or region or product area.
• Specific insurance schemes provide protection for producers and service providers, and compensation for victims, for disabilities arising from specific events. These include medical indemnity schemes, public and private liability schemes, sporting injury schemes, crime victims’ compensation schemes.
• For the individual, insurance against particular life events such as total and permanent disability (TPD) could have greater encouragement from government. For instance, tax neutrality for friendly society products.
• Aspects of each of the pooled schemes, and individual products, may be appropriate to import into a National Disability Scheme.
• It would appear that lump sum payments increase the risk of eventual depletion of funds while there is still a need for care, forcing beneficiaries into reliance upon social welfare arrangements.
• Annuity-type products may be a solution. What scope is there for modification of taxation arrangements to allow for common-law court-determined settlements to be paid as structured settlements in the form of an annuity?
• In assessing the cost of a national scheme, it is important to take into account the scope for reduction in other social security costs. For instance, a well designed disability care and support system may reduce the number of families on welfare by making available more professional carers.
• Concerning compensation it appears that no current approaches allow sufficiently for the inflation rate of medical and care costs relative to general inflation. And normal discount rates may understate the appropriate risk based rate of return, with both factors creating a downward bias to compensation amounts.

ACFS Research Director Prof Kevin Davis noted that “issues of adverse selection and moral hazard are prevalent and unavoidable when insuring against the costs of disability. They may be mitigated but at cost.” For instance, testing for genetic predispositions to various chronic diseases is now possible but Government must decide whether broad use of these techniques, which would lead to differential charging, is consistent with broader societal objectives. Similarly, technology may be applied to determine risk profiles based on behaviour e.g. the tendency of vehicle drivers to speed can be tracked. Arguably the use of the technology may compromise civil liberties.

Disability insurance is a “long tailed” risk business. Any proposal for mandating the involvement of commercial providers in any scheme must consider the solvency of insurers. Prof Ralston commented that “the greater involvement of non-statutory bodies would support innovation over time, and would spread the risk, but there must be opportunity for profit”.

A key issue is scheme coverage. Prof Davis asked

“Should there be a national scheme for inherited or genetically based disabilities, should such a scheme also cover accident induced cases? This might reduce the potential role for insurance schemes and would likely leave the taxpayer carrying more of the burden.”

View Submission to Productivity Commission

The Disability Insurance Roundtable Report included in the submission is part of the ACFS Financial Roundtable Report Series. The Series assembles the expertise and thoughts of leading financial services individuals on relevant topics. Through the use of roundtables, ACFS enhances its thought leadership role by facilitating discussion among academics, industry practitioners, policymakers and regulators.  This discussion contributes to the public policy debate and identifies further research areas. More in this series…

Media contact details:

Professor Kevin Davis
Research Director, Australian Centre for Financial Studies and
Professor of Finance, University of Melbourne
W: +61 3 9666 1050
Mob: +61 409 970 559
kevin.davis@australiancentre.com.au

Professor Deborah Ralston
Director, Australian Centre for Financial Studies and
Professor of Finance, Monash University
W: +61 3 9666 1010
Mob: +61 419 650 318
deborah.ralston@australiancentre.com.au

www.australiancentre.com.au

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