ASIC Report 675 Default insurance in superannuation: Member value for money shares insights from ASIC’s work on measuring the value of default insurance in superannuation.

The report has implications for how trustees and group insurers should approach default cover. It also further underscores ASIC’s desire for strengthened data to measure member outcomes.

ASIC found:

1. There is wide variation in the pricing of default insurance.
2. Claims ratios are a good indicator of member value for money and insurers expect to pay about 79 cents in claims, on average, for each dollar of premiums.
3. Some groups of members may be receiving relatively low value for money, particularly younger members.

Finding 1: Wide variation in pricing

ASIC found wide variation in the pricing and design of default insurance arrangements. It found, for example:

• for two identical 30-year old women, the woman in the product with the highest premiums would be paying a total premium 25 times greater than the woman in the product with the lowest premiums; and
• for two identical 50-year old men, the total premium ranges by a factor of 37.

While some of this variation is due to trustees providing different types and levels of cover as default, ASIC found the unit price of cover also varied widely.

ASIC attributed the range in pricing to factors such as:

• whether IP was included in the default offering, and the waiting period and benefit periods offered;
• death and TPD cover levels (noting the highest amount was 9 to 27 times the lowest amount);
• whether cover level varied based on age (which half of the MySuper products analysed did);
• composition of a MySuper product’s membership (such as mainly heavy blue v mainly white-collar membership); and
• generosity of terms and conditions.

Acknowledging that value for money cannot be based on premiums alone (and the most expensive insurance is not necessarily the best value, and the cheapest not necessarily the worst), ASIC urged trustees to take the varied factors driving price into account in considering whether default insurance designs are appropriate for different groups of their members.

Finding 2: Claims ratios are 79% on average

ASIC considers claims ratios a good indicator of the outcomes members collectively receive, because it is a direct measure of the share of premiums returned through claim payments.

It looked at accrual claims ratios for the largest group insurance policies of 11 superannuation trustees over a six year period to 2018–19.

It found that over this period, on average:

• the accrual claims ratio was 79% (insurers expect to pay about 79 cents in claims, on average, for each dollar of premiums);
• the claims ratio is higher for TPD cover (87%) and death cover (80%), and lower for IP cover (61%) (attributed to the typically increased cost of managing IP claims); and
• a significant share of claims is yet to be paid (and for TPD and IP cover in particular, insurers have so far paid less than half the total amount of claims they expect to pay based on the default insurance arrangements in place over the six year period).

ASIC emphasised the importance of claims ratios in helping trustees monitor the outcomes they are delivering for different cohorts of their members and whether current premium levels are likely to be sustainable over time.

Finding 3: Some members may be receiving low value for money

In looking at how value for money (measured by the accrual claims ratio) varied across the 11 trustees analysed and across specific groups of their members, ASIC found on average, over the six year period to 2018–19:

• significant variation in the accrual claims ratios across trustees, their individual group insurance policies, and groups of members within them;
• higher accrual claims ratios for death and TPD cover among the not-for-profit trustees compared to the retail trustees;
• larger ranges of claims ratios among the individual group insurance policies held by each trustee (likely explained by the fact different group insurance policies often represent distinct groups of members); and
• members aged under 30 had systematically lower accrual claims ratios than those aged over 50 and are receiving significantly less value for money based on this measure. ASIC noted the difference in claims ratios between age cohorts raised questions of fairness, particularly to the extent it reflects the unintentional result of the degree of risk changing over time without commensurate adjustment in premiums. ASIC noted that a number of trustees had addressed such concerns in their current default arrangements.    

ASIC emphasised the importance of trustees measuring and understanding the outcomes they are delivering to different cohorts of their members as measured by claims ratios – and the factors that drive these outcomes, and trustees taking these into account when designing and pricing default insurance arrangements.

Value for money and claims handling

ASIC urges trustees to look beyond claims ratios in identifying risks of member harm, such as to the way they and insurers handle claims.

It points out, for example, high rates of declined claims could indicate that members do not fully understand when they are eligible to receive a claim payment, and a high number of withdrawn claims or disputes, or long claim processing times, could indicate frictions in the claims process.

Shortcomings in data and analytics

ASIC noted that most trustees found it challenging to provide all the data it required and ought to improve the standard of data they collect about members.

The report offers specific guidance on how trustees can use data to monitor and review member outcomes and importantly, determine whether they are delivering value for money, and whether groups of members, having different insurance arrangements, are fairly treated.

ASIC advises trustees, for example, to:

• segment their membership by whether or not members have default cover and by demographic characteristics (such as age, gender and occupation category);
• for each cohort, monitor the levels of premiums and consequent balance erosion, claims ratios and other claim-related indicators (such as claim incident rates and claims handling measures);
• compare member outcomes to industry-wide measures (such as claims-related statistics published by APRA);
• consider embedding detailed data-sharing arrangements in service-level agreements with insurers; and
• seek updates on how their insurers are improving their own data management practices.

Implications

Default group life cover provides significant value to the many Australians who hold life insurance through superannuation. ASIC recognises this within Report 675.

However, Report 675 highlights the continued focus on examining the value of insurance in superannuation. Indeed the report follows on from reports such as ASIC report 633 Holes in the safety net: A Review of TPD insurance claims about concerns regarding the value of default cover to certain cohorts and trustees having a better understanding of what value different member groups are receiving.

It is important as such for superannuation trustees to continue to provide access to insurance products that are suitably designed for their members and different cohorts within their membership – and to demonstrate that value, amongst other things, through robust data analysis.