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; • of 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 The government is “concerned that retirement savings are being eroded by insurance premiums [that] do not always get value for money”. “They’ve wasted a year and come up with a compromised, unenforceable code”
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 2 • 11% - Rice Warner 3 • 26% - KPMG 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 analysis 1 , reduction in number of members with cover is 50%: Balance of less than $6,000 45% reduction Under 25 years of age No contributions 18% within 13months reduction 1 KPMG, Insurance in superannuation: The 46% reduction impacts and unintended consequences of the proposed Federal Budget changes.
Key pricing considerations Anti-selection Cross – Subsidies Expenses
Risk Controls
Trustee Responsibilities Overall Individual Membership members and (premium claimants 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 More costly Bulk administration – low expense ratios
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
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