Federal Budget insurance changes from a Super Fund perspective 23 - - PowerPoint PPT Presentation

Federal Budget insurance changes from a Super Fund perspective

23 October 2018

Agenda 1. Recap of Budget for Insurance 2. Impact on Premium Rates 3. Risk Controls 4. Operational aspects

Recap of Budget for Insurance

Overview Opt-in rather than default insurance for accounts:

• that have balances below $6,000;
• f new members who are under 25 years old; or
• that have not received a contribution for 13 months or

longer By 1 July 2019 Actual legislation drafted. Passed Lower House. Senate Economics Committee recommends the Bill be passed. Nothing happening in October.

Backdrop

“They’ve wasted a year and come up with a compromised, unenforceable code” The government is “concerned that retirement savings are being eroded by insurance premiums [that] do not always get value for money”.

Submissions… some common themes

• Don’t remove cover if account balance < $6,000

(FSC, TAL, AIA, Berrill & Watson, AustralianSuper)

• Inactivity period (ASFA, AustralianSuper, Link Group, ISA)
• Premium increases (KPMG, RiceWarner, Mercer, AFA)
• Hazardous occupations (Cbus, ISA, AIA)
• Later commencement date (Actuaries Institute, ASFA, FSC,

AustralianSuper, RiceWarner, Mercer, TAL, REST, Munich Re)

Premium increases - estimates

• 7-10% (for members over 25) - Government Actuary

1

• 11% - Rice Warner

2

• 26% - KPMG

3

1 Department of the Treasury, Tabled Document 2, May 2018, p. 4 (tabled 20 July 2018). See also Mr Ian Beckett,

Principal Adviser, Retirement Income Policy Division, The Treasury, Committee Hansard, 20 July 2018, p. 90

2 Rice Warner, Federal Budget Average Premium Increases 3 KPMG, Insurance in superannuation: The impacts and unintended consequences of the proposed Federal Budget

changes.

Pricing

Impact on Group Insurance Volumes

Removal of 20% - 80% of insured members - differs for different funds Using one industry analysis1, reduction in number of members with cover is 50%:

Balance of less than $6,000 45% reduction

Under 25 years of age 18% reduction

No contributions within 13months 46% reduction

1 KPMG, Insurance in superannuation: The

impacts and unintended consequences of the proposed Federal Budget changes.

Key pricing considerations

Cross – Subsidies Expenses Anti-selection

Risk Controls

Trustee Responsibilities

Individual members and claimants Overall Membership (premium sustainability)

A changed environment…

• Significant reduction in coverage:
• Anti-selection magnified
• Less scope to cross-subsidise (e.g. hazardous occupations)
• Opt-in
• Selective roll-in
• It takes 15 months to reach $6,000 balance if you

earn $50,000

• How well will auto-consolidation work?

Is the pendulum swinging?

GROUP INDIVIDUAL

Little cross-subsidisation Bulk administration – low expense ratios More costly

The $6,000 question(s)

• Will traditional group insurance risk controls work?
• Recent commencement of employment prior to insurance cover

starting.

• Active employment / limited cover and when?
• Or will there be a significant enough pool of semi-active

accounts who can make voluntary contributions to activate cover?

The $6,000 question(s) (cont.)

• Simplicity and consistency
• Does it depend how you get to $6,000?
• Roll-in?
• ATO consolidate? Member generated or ATO generated?
• Salary sacrifice: Regular? Lump Sum? Bonus?
• Admin constraints
• Or do you just say: All limited cover?

The $6,000 question(s) (cont.)

• Member experience
• It takes 15 months to achieve a $6,000 balance if you earn

$50,000. So is it worth a little extra complexity to ensure these members can have cover that is not limited?

• But what if the U25 rule and ATO auto-consolidation works

efficiently?

• Potential to be penalised for making good superannuation

decisions (e.g. salary sacrifice, voluntary contributions)

And what about the changeover date?

Operational Aspects

Operational aspects

• Properly resourced project with appropriate governance
• Interaction with Insurance in Super Code of Practice:
• Lapsing rules
• Reinstatement rules
• One touch of the admin system?
• Implementation Date
• Premium Guarantee,
• Promotion of need for cover pre-changeover
• PDS, Insurance Guide, SEN, letters

Questions and discussion