Two reviews of super fund group insurance have come to two quite distinct conclusions.
It was reported recently that the peak superannuation association, ASFA, has supported an initiative to standardise how funds should disclose their insurance arrangements.
The researcher who proposed it, ChantWest, was reported in the media saying the huge ranges in premium prices mean we should question whether automatically bundling insurance with occupational Workplace super is still a good idea. Meanwhile, Rainmaker has completed their 2010 super fund group insurance survey and found that despite criticisms leveled against the sector, premium prices are continuing to fall by up to 5 per cent per year since 2003.
In even better news, the Rainmaker study of 7,000 group insurance policies found these improved prices are accompanied by more choices, better sum insureds, higher AALs and improving flexibility. Better-priced premiums, however, do not mask the core problem of insurance, namely that super fund members are buying too little.
Sure it's great that super fund members can buy lots of extra well priced insurance, but the overwhelming majority still stick with the default standard cover that averages only $125,000.
This cover may be better than nothing but $125,000 doesn't do much when the average mortgage is more than $400,000. Add in the consumer credit debt many Australians now carry and how much their families' future lifestyle needs will be and its plain to see that the super fund standard default cover isn't cutting it.
But in an environment where funds are obsessed with cutting costs, it's not hard to avoid a race to the bottom as funds are loath to add fees for compulsory insurance, regardless how well priced it may be. It's even leading to the perverse result where funds with expensive insurance just offer a small amount of it so its headline price can stay low - hardly a solution.
Against this stark reality we can debate how insurance disclosure can be improved but I'm not sure it's the main game. Insurance disclosure is, nonetheless, important and it deserves the same obsessive focus that we as an industry gave to fee disclosure.
The catalyst for this improved disclosure may, however, be upon us because there is indeed a problem of massive price variations among super funds for the insurance they bundle. Part of the answer might be disclosure of sales commissions because many even so-called fee-for-service master trusts embed 35 per cent commissions into their premiums.
Fixing this won't automatically slash premium prices across the board and we will still have the unavoidable situation of some funds offering insurance at great rates and some offering lousy rates because this is the macabre price for a super fund choice regime that is held together by disclosure and transparency. In other words, without a national insurance fund it's buyer beware with inevitable winners and losers.
The bigger worry is this has lead to knee jerk reactions to unbundle insurance from superannuation. But be careful what you wish for because if we do this we may just push people into the retail insurance market and turn our under insurance problem into a national disaster. Standard cover is inadequate, but it's still better than no cover at all.
A better first step would be massively upgrading the woefully inadequate legislated insurance minimums that currently exist for Workplace funds. It won't solve the whole problem but it's a start.
