By Sean Williamson, Chief Group Insurance Officer, MLC Life Insurance

After intense debate and compromise, the Your Future, Your Super legislation has become law. It represents a seismic shift for not only superannuation funds and employers, but particularly for members who are expected to benefit as they build towards a strong retirement outcome.

As part of the reforms, employers will be required to make superannuation contributions to an existing fund (‘stapled’ fund) for new employees from 1 November this year, unless the employee decides otherwise. Further, if new employees do not decide on a new fund, employers are no longer allowed to automatically create a new super account in the employer’s chosen default fund.

While positive in its intent - to reduce the number of Australians with multiple and unnecessary superannuation accounts - in practice the reform will mean that members will assume a greater personal responsibility in insurance decision making and therefore the consequences of their decisions will be much greater.

While the impact of stapling on group insurance may not be seen immediately, if not managed well there could be significant short and long-term impacts for funds, members, and their insurers.

So, what are these impacts, and how can superannuation funds and trustees prepare? What will the future look like?

Changing from an employer-led to member-led system of group insurance

Overall, the superannuation system has served Australians well and the funding of insurance premiums through superannuation has allowed Australians to better address the underinsurance gap. Now 70 per cent of all life insurance premiums in Australia, Retail and Group, flow through the superannuation system. It is the primary channel of accessing and funding life insurance.

One of the hallmarks of group insurance in Australia has been that employers, in collaboration with funds and Trustees, are responsible for determining the default insurance arrangements for their employees, should they not make an active choice. Generally, employers have been well-placed to know which fund is able to provide the most appropriate insurance arrangements for their employees having regard to the types of occupation and often terms can be tailored to meet their needs.

From 1 November, the decision-making will shift from employers and Trustees to individual members. In a stapled world, when members change employment, they will retain their existing super fund arrangement unless they make an active choice. This means many will retain the insurance selected by an earlier employer which may not be appropriate for their changing circumstances. Changing funds, making insurance changes and in some cases changing employers or occupations may lead to gaps in insurance cover and Trustees will need to deeply think about the insurance education and support it provides to new and existing members to avoid these consequences of the Your Future, Your Super changes.

Consider this. The average employee in Australia will change jobs 12 times throughout their life, with an average tenure of 3.3 years. This means that each time they move jobs, they will need to check that the insurance cover they have in place for them at their default or ‘stapled’ fund is right for their risk as their financial burden changes. It is right to ask: how many people will do this if unprompted by their superannuation fund?

To illustrate the point, take for example an 18-year-old male who takes a part-time job in hospitality. The fund he joins provides levels of cover appropriate for his type of occupation at that time. A few years later, he then gets a full-time role in the construction industry, which in general is a much riskier sector for illness or injury but he does not make an active choice to change funds. As his years in the job accrues, he gets married and has children, but then suffers an accident at work. Because he did not join his new employer’s fund and accompanying insurance arrangements, he has been left without adequate insurance protection, potentially putting he and his family’s future in jeopardy.

Understanding member behavior and doing the best we can to make sure members understand these consequences is so critical.

Improving member engagement with life insurance

In principle, giving members more control of their insurance arrangements makes sense when they are well informed about the decisions they are making. In practice, however, we know that engagement across the industry, whilst it has improved over time, is still lacking. This is particularly the case for younger members, especially those under the age of 25, where Putting Members Interests First (PMIF) prevents members within that age group from receiving opt-out insurance cover.

Superannuation funds, supported by the life insurance partners, need to be clear to members about the risks of insurance choices in a new ‘stapled’ superannuation system to ensure they make appropriate, informed choices as their circumstances change. However better educating members is only part of the solution. Engagement strategies need to evolve so that members receive communications relevant to them, through their preferred channel, with appropriate supporting offers tailored to their circumstances at that point in time. Insurance products will also need to evolve to support increasing personalisation of default insurance over a member’s lifetime as data and digital capabilities allow.

Members should also be well informed of the risks to insurance cover when switching funds. We want to avoid scenarios where members inadvertently cease their existing insurance arrangements, without understanding potential eligibility barriers into insurance within a new fund, particularly when we consider the interaction with other recent regulatory reform such as Protecting Your Super (PYS) and PMIF. Insurers and funds will need to work together to ensure eligibility terms are appropriately adapted where necessary.

Changes to the risk pool, pressure on sustainability and future benefit design

Given the recent changes to group insurance, there is already a challenge to make a fund’s insurance offer sustainable in the long term.

Our expectation is that stapling will require funds and insurers to focus more on sustainability, particularly on ensuring the member behaviour won't adversely impact the claims experience.

With a member-led, opt-in model, we can expect to see a higher proportion of less healthy lives opting-in (anti-selection) to group insurance, which will mean funds may have to consider tightening cover commencement terms for members, including more stringent At Work periods, lower Automatic Acceptance Levels (AALs), fuller underwriting and terms and conditions limiting accumulation of cover across funds, for example.

This is where data insights and a strong collaborative partnership with a life insurer becomes so crucial. Indeed, trying to ensure that a fund’s pricing and terms and conditions are all competitive will be more difficult, and uncompetitive insurance offerings may ultimately further accelerate the mergers we are seeing across the superannuation industry.

What will the strategy be? In our view, we believe funds will need a strategy that balances member acquisition without being overly competitive on insurance terms and conditions, which in turn may lead to uncompetitive premiums and thus lower member acquisition volumes. Fund strategies will need to consider insurance design that allows for more personalisation for new members as opting-in allows funds to gain more member information around their circumstances, and what opportunities exist for new members to change their cover as they get older, but all this has inherent risks. What about the product set being offered and the mix of TPD and IP cover? Funds should give deep thought to the objectives and respective claims philosophies that each benefit covers and how this is likely to optimise member outcomes at different life stages. Examples may be to reduce replacement ratios on IP or reduce TPD sum insureds in line with broad needs across the membership base.

These changes make it even more difficult for Trustees to comply with their obligations to ensure insurance arrangements are appropriate for certain cohorts. Insurers will need to support funds in ensuring benefit designs carefully consider how YFYS will change member demographics, and this is where understanding member behaviour will be critical.

Stapling won’t kill default cover in super, but we need to watch carefully

Default or automatic life cover inside superannuation is delivering value for members and must continue to be supported. Simply put, members are benefiting from their insurance in super, which is demonstrating value for money and delivering excellent member outcomes. We need to make sure these benefits are not diluted.

The intent of stapling is right, but we must preserve the integrity of the system. It will require an increased focus and collaboration with funds and insurers around managing increased insurance risk for all parties, funds, insurers and most importantly the members. If poorly managed, these risks could accumulate, and members will be impacted.

As we get closer to 1 November and beyond as the impacts won’t be immediately felt, it is essential for super funds and insurers to continue to share ideas and information, to collaborate and to actively support each other. Working together in this way is the best way to make sure we deliver for members both now and into the future.