After an unprecedented series of challenges for both the superannuation and life insurance industries, green shoots continue to emerge in relation to insurer pricing. Upcoming rate renewals may offer some funds an opportunity to offer reduced premiums to members and consider broader insurance priorities.
The Protecting Your Super (PYS) and Putting Members’ Interests Firsts (PMIF) legislation, introduced over the past few years with the good intention to minimise the effect of insurance premium costs on member accounts, ultimately resulted in material pricing and affordability challenges for funds.
Further, while the Australian market was largely sheltered from the most extreme health outcomes of the COVID-19 pandemic, most group life insurers passed on COVID-19 price loadings as a means of mitigating a potential new source of mortality and morbidity risk.
Our research shows price changes in 2022 were relatively benign compared to the steep increases observed in 2019 and 2020 and some funds that have either tendered their insurance or gone through a rate renewal have been able to secure premium reductions for their members, as illustrated in Chart 1. While pricing is fund specific and based on the claims experience of its unique membership cohort, the downward trend is a welcome outcome for funds as they continue to grapple with affordability.
This favourable pricing environment is also reflected in Chart 2 that shows an improving trend in terms of insurer profitability, further indicating stability in premium pricing.
Rate renewals, superannuation fund mergers and an unwavering focus on member outcomes has provided opportunity and impetus for funds to refresh their insurance priorities.
Many funds have completed or are moving through their first formal rate renewal process since PYS/PMIF.
Not all pricing trends are positive though and observed claims notification patterns for some funds have been increasing. Instances like this require due consideration from funds and insurers on whether this is a once-off movement, or a trend.
Independent pricing can provide valuable assurance in these discussions. In fact, best practice suggests trustees should obtain independent assurance in the absence of a tender to ensure pricing is fit for a fund’s specific claims experience and consistent with members’ best financial interests.
Conducting a market tender is a material undertaking but there is strong competition in the insurance market and excellent member outcomes can often be achieved by funds as a result. To obtain the best member outcomes, funds need to apply a whole-of-fund consideration to how an insurer best fits with their operational and strategic priorities, digital agenda and, importantly, ensure alignment with their culture and values. Funds that plan and engage early, both with internal stakeholders and the insurance market, are best placed to extract optimal outcomes for their members.
Insurance is only one component of a merger or Successor Fund Transfer, but often constitutes one of the more complex and risky transition points because of variances in insurer, insurance arrangements and underlying terms and conditions.
Funds often undertake a “lift and shift” strategy in relation to insurance within a merger to minimise change and maximise merger success, with a view of satisfying equivalency requirements at the point of transition. However, longer term, this approach may not necessarily satisfy members' best financial interests. The potential proliferation of insurers, insurance arrangements and minutiae in underlying terms and conditions within a single fund make it increasingly difficult for a merged fund to generate operational and insurance scale efficiencies, comply with new regulatory standards and provide a streamlined best-in-class member experience.
It is therefore no surprise to see funds who have grown through mergers addressing this legacy product issue by embarking on insurance simplification and harmonisation programs.
In recent years APRA has been consistent in calling out[1] the need for objective and quantifiable member outcomes to be identified and assessed at a cohort level. ASIC too has extended the need for cohort level analysis to insurance in its Report 760[2] where it specifically mentions that trustees need to do more to measure outcomes at a cohort level.
While insurance is built around the concept of cross subsidies, cohort level analysis will mean that, in many cases, the only way they can continue to exist is if trustees consider them to be in members' best financial interests. This may be possible in some instances (e.g., where default insurance covers both death and TPD, and there are offsetting cross subsidies for members across both products) but in many instances cross subsidies will be harder to justify and may ultimately deemed not appropriate.
Savvy funds have identified that, in this increasingly competitive environment with pressure on attracting and retaining members, it is critical to have an excellent service-oriented experience in relation to insurance and member interaction more broadly. A clear and simple insurance onboarding process with streamlined underwriting arrangements can make the insurance journey for members both easy to understand and easy to transact. To this extent, a simple insurance proposition coupled with an omni-channel engagement platform can be a clear differentiator for funds.
The need for funds to develop a coherent engagement program is further strengthened when noting the material reductions in insured members within superannuation funds because of PYS and PMIF– some industry funds now only provide insurance benefits to half of their members. Funds are seeking to improve engagement by understanding member behaviour through insurance focused consumer surveys and preparing Annual Insurance Statements aimed at prompting members to engage with their insurance arrangements.
Insurance continues to be an important part of superannuation. ASIC's Report 675 on Member Value[3] states insurers expect to return around 79% of group insurance premiums to members through claims. This translates to $5.5bn in claims paid annually to members based on a total annualised group premium pool of $7bn. This demonstrates that insurance in superannuation provides meaningful and excellent value for money – especially when compared with much lower payout rates experienced in other insurance sectors.
However, more can be achieved by the sector on behalf of members. Greater assurance on insurer pricing and cohort level monitoring is best practice and required to satisfy member financial interest requirements. The onus will be on funds to dedicate the appropriate time and resources to maximise the benefits insurers can provide through the provision of various digital tools, member wellness and engagement platforms.
The importance of developing a strong partnership approach, coupled with the material financial value associated with insurance contracts over a rate guarantee period, further highlights the importance of this sector to both members and the broader economy.
