Super is the main vehicle that provides most Australians with insurance cover for death and disability.
While average levels of insurance have risen in recent years because of increased default levels, Australians, generally, remain chronically underinsured.
A comparison of the 2007 and 2010 Annual Superannuation Bulletins issued by the Australian Prudential Regulation Authority shows that average insurance payouts per death or disability for industry funds and retail funds have more than doubled to $47,882 and $32,238 respectively.
Payouts from corporate funds have increased 50 per cent to $81,000. Few would argue, however, that this represents adequate insurance.
Let’s look at an example of a fund member earning $50,000 a year. Even if their insurance cover is $150,000 or $200,000 – a big improvement on past levels – this amount won’t go close to meeting the mortgage that, across Australia, now averages over $380,000, let alone provide future income for their family if they were to die.
While more work is needed to establish a good base of default insurance cover, the next step is to improve voluntary insurance structures so members can build on their default cover and tailor their insurance coverage to their needs quickly and simply.
Most super funds now provide some sort of voluntary insurance facility for members to increase their default insurance in the event of death or disablement.
These facilities rely on the member initiating and applying for the extra cover, and typically providing medical evidence in support. Faced with comprehensive application processes and drawn out medical assessment procedures, it is unsurprising that typically only 1 per cent to 3 per cent of members have opted into these voluntary insurance schemes.
While apathy remains a big issue, the other major contributor to low take-up rates is poor accessibility. Many large funds have voluntary insurance structures that give members access to extra insurance cover under automatic acceptance (that is, without any medical evidence needed).
The problem is these have been restricted to offers on commencing employment, consisting of an offer to top up standard default insurance to higher levels. While some of these structures have been available for some time, they have been for relatively small amounts of cover, and again take-up is low.
More recent changes have included ‘life events’ cover, which allows members to increase voluntary insurance within, say, 60 days of the occurrence of a specified event, such as marriage, divorce, birth of a child and establishment of a mortgage.
While this is a positive development, life events are at risk of suffering the same low take-up rates because these initial offers and life events are only available to members at a time of significant change in their lives. It is hard to get engagement from members at a time of adjustment to a new job, house, partner or baby.
There is, therefore, a significant opportunity for superannuation funds to improve the accessibility of insurance for members. If some of the obstacles for members can be removed, then there is hope for further improvements in insurance levels.
Recent group insurance deals have shown super funds have been able to negotiate a new generation of automatic acceptance offers at much higher levels of discretionary insurance of $500,000 or more. These higher levels of coverage have sometimes been made possible by the inclusion of pre-existing condition clauses in the insurance contracts.
But pre-existing condition clauses are a double-edged sword. Accessibility to significant levels of insurance is enormously increased and there is the potential to use online and smartphone technology to reach members quickly and directly.
The danger, of course, is that the detail of the pre-existing condition exclusion is not adequately communicated. Members may think they are fully covered, pay for what they think is full coverage, only to find later that it is not what they expected. Only time will tell if they become a new source of complaints to the Superannuation Complaints Tribunal.
The power of significant new levels of automatic acceptance lies perhaps with a periodical one-off campaign targeting members with short, concise offers that can be quickly and easily responded to.
Such a campaign, delivered by succinct direct mail or over secure online and other technology, has the potential to engage members long enough to persuade them to ‘click here to apply’.
Other creative designs and offers are also possible, for example, providing ‘birthday’ offers that allow increases to voluntary cover at significant ages (say 30, 40 and 50). Unlike other life events, funds know when a member’s birthday will occur so they can target them with an offer at a time that may be free of the distractions of starting employment, marriage, birth or other events.
Many Australians would acknowledge they really should do something about life insurance, particularly if they can pay for it out of superannuation money. If the voluntary insurance offer can be responded to on the spot, by ticking or clicking a couple of boxes, we have seen the take-up rates can be dramatically increased.
The next phase for insurance technology is to be able to deliver secure online communications that allow interaction and response immediately, via online and smartphone technology. Targeted, proactive insurance offers that are designed to avoid medical evidence altogether (rather than merely speed up the completion of forms) are much more likely to deliver higher take-up rates for voluntary insurance.
Where pre-existing condition clauses are used to avoid the need for medical evidence, careful consideration of disclosure wording is required to allow members to make an informed decision, however, we believe technology has a big role to play in addressing underinsurance and some funds and insurers are starting to do this.
Significant steps have been made to increase default levels of insurance cover, however, there remains more work to do. Once reasonable levels of default cover are in place, true insurance adequacy, tailored to the needs of individuals, should be delivered through voluntary insurance.
Through a combination of better, more flexible group insurance policies with designs to allow quick and easy applications for insurance, and targeted proactive insurance offers delivered through smart technology, we have the opportunity to greatly increase the role of voluntary insurance in addressing the underinsurance problem.
Phil Patterson is a senior consultant specialising in group insurance at Towers Watson.
