Need to know
- The 2019 Productivity Commission recommended an independent review of insurance in super
- Almost three years on, the federal government has yet to say when this review will happen
- Super Consumers Australia says the review would be an important step towards determining if this is the best way for Australians to get quality, good-value cover
What happens if you suffer an illness or injury that means you can't ever work again?
Almost 10 million Australians get disability insurance through their super, making it a vital protection for anyone who can no longer earn a living after a catastrophic event.
But, as the regulator has pointed out, it's a safety net with holes.
We've previously told the story of Wayne, a truck driver who had a stroke and couldn't work again. His insurance proved useless because his work was classified as 'hazardous' by his insurer and he faced an almost impossible test to claim.
Similarly, Queensland woman Rachel was forced out of work by a medical condition, but had her claim denied because she was technically a casual worker.
These stories suggest there's a way to go before insurance in super gives all Australians quality disability cover.
A review of insurance in super
In its 2019 report, the Productivity Commission recommended that the federal government set up an independent public inquiry into insurance in super within four years.
The report acknowledged that this type of insurance is a complicated product that aims to balance very different objectives. First, it needs to make sure the cover will pay out if you ever suffer a disability that stops you from working. Second, the super fund has a duty not to unduly erode your retirement income with the insurance premiums you pay through your super.
The Commission said this review could evaluate the role of insurance in super and work out if further policy changes were needed. It could also clarify how this insurance interacts with other forms of cover that potentially overlap, such as workers' compensation, which financially assists people who are forced out of work.
Superannuation Minister Jane Hume has said there's some merit in holding a review. But the government has yet to commit to the review going ahead.
Fund members can't always tell what level of cover they have or whether it meets their needs.
Ongoing issues with insurance in super
Since the Productivity Commission's recommendation, some concerns around 'balance erosion' have at least been addressed by the Protecting Your Super package. This reduced the amount of 'zombie insurance' people were paying for through inactive super accounts.
But there are still major concerns as to whether this insurance is affordable and gives all fund members quality cover.
One of the regulators (APRA) has written to super funds outlining "a re-emergence of some concerning developments in group life insurance", including its alarm at premium volatility. These developments had led to a "deterioration in [the] group life insurance claims experience".
The letter went on to say that these developments "if unaddressed, are likely to result in poor member outcomes, and adversely impact the availability and sustainability of life insurance through superannuation".
ASIC weighs in
The other relevant regulator, ASIC, released research on this insurance in 2020. It found that unfair variations in the level and type of cover offered were widespread, with some funds offering 20 times as much default cover as others. The research also found variation in the premiums that members pay for this insurance, and that higher premiums didn't necessarily mean better cover.
The research also found variation in the premiums that members pay for this insurance, and that higher premiums didn't necessarily mean better cover
ASIC concluded that some groups of super fund members, including people under 30 and those in insurance policies with restrictive terms, "may be receiving relatively low value". This finding raises questions about whether this insurance is suitable and fair for all members, ASIC said.
Members 'confused' and 'overwhelmed'
According to a separate 2020 ASIC research project, fund members have difficulty understanding their insurance, with a third of survey participants feeling "confused", "overwhelmed" or "uncertain" after talking to their fund about their cover. It follows that even those who take an interest in their insurance can't always tell what level of cover they have or whether it meets their needs.
In August 2021, ASIC returned to its work on insurance in super and found that funds had improved their cover overall but that some gaps remained.
Insurance in super code dropped
Another relevant development was the industry's decision to scrap its Insurance in Superannuation Voluntary Code of Practice.
This code laid out a basic set of commitments from industry to people, and how they'll be treated when they make a claim. Problems in claims-handling, such as a delay, can cause financial difficulties for people, distract from the health recovery process and even worsen existing mental health conditions.
Both the Productivity Commission and Banking Royal Commission had recommended the industry introduce such a code and make it enforceable. Consumer advocates criticised the move to scrap the code altogether.
Both the Productivity Commission and Banking Royal Commission had recommended the industry introduce such a code and make it enforceable
Karen Cox, CEO of Financial Rights Legal Centre, says the scrapping shows "that the superannuation industry is not serious about creating and improving standards that consumers can rely on".
Super Consumers Australia director Xavier O'Halloran agrees: "The lobby groups have shown once again they are incapable of effective self-regulation and continue to rely on the government to do the heavy lifting in protecting consumers," he says.
An enforceable code would have helped protect the rights of consumers. The industry's decision not to go through with it adds weight to the calls for a review to determine whether this insurance is of value for all Australians.
Restrictive terms still in insurance policies
At Super Consumers Australia, we're still working hard to make sure insurance in super gives all Australians affordable and quality cover.
But, as we've highlighted in the past, these policies can include fine print terms that make claims extremely difficult for people who are out of work, working part-time or casually, or are carers. Older Australians can also face a tough task claiming.
The restrictive terms are often framed purely in relation to a person's ability to do physical tasks, rather than their ability to work, meaning that people with a mental health disability have a much harder time claiming.
The restrictive terms are often framed purely in relation to a person's ability to do physical tasks, rather than their ability to work
Last year, we drew attention to the pandemic exclusions in the insurance policies of some super funds. These could have been used to deny claims to people when they most needed them.
After we lobbied the industry, it gave fund members a temporary reprieve from these terms. But the episode again shows that such restrictive terms continue to appear in this insurance cover – without any check of whether this cover is suitable for people who got it by default through their super.
People whose claims would be assessed under these restrictive tests pay the same premiums as anyone else for what is essentially junk insurance.
Should life insurance be separate from super?
At least one fund, Prime Super, has questioned whether insurance should be included in super. It made a submission suggesting that a "broad-based insurance scheme" replace the status quo.
"This will provide a better solution through a large pool of diversified members in which individual member risks can be balanced through a large pool," the submission continues. Prime Super also suggests that this change would see members end up with more retirement income.
Wider review needed
Australia has a number of safety nets, including workers' compensation, the disability support pension, private savings and disability insurance. A review could clarify how these systems interact and where the gaps are.
There are people out there that have suffered a catastrophic event and found they've been paying for insurance for years that won't give them a centXavier O'Halloran, Super Consumers Australia
Some other countries have different models for providing life insurance to people outside the retirement income system.
O'Halloran says it's time to weigh up these alternatives to see whether they could serve Australians better than the current system does.
"We know there are some serious questions around the efficiency and equity of insurance in super for people who suffer an unexpected event," he says.
"Take a simple example like being unemployed at the time of disability. Some policies will cover you, some won't.
"There are people out there that have suffered a catastrophic event, become disabled, and have found they've been paying for insurance for years that won't give them a cent."
The right time for a review
A new 'stapling' system has begun in super, which means a super fund is 'stapled' to them and follows them from job to job. David Bell, executive director of The Conexus Institute, says this change makes a review even more important.
"Now that we have the stapling model [settled]… that has a lot of implications for insurance," he says.
Stapling is projected to save consumers $2.8 billion over 10 years, thanks to far fewer unwanted accounts being created.
"Every fund, particularly the ones that will benefit most from stapling, will have people from a huge range of backgrounds and employment characteristics," says Bell.
"[It's] the right time to say: is insurance within super the best standard it can be? Is it well set up to meet these future challenges?"