Most superannuation members are facing premium increases on life insurance bought through their super funds, after the regulator warned big insurers to lift their game.

In a move that could have implications for millions of super members, the Australian Prudential Regulation Authority has put the heat on insurers to better manage their risks on group insurance policies sold through industry super funds.

Most super funds have already passed on big increases for disability and income protection in the past year, but some haven’t.

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Chant West research indicates that members of the following funds might expect to see premium increases once new insurance contracts are negotiated later this year:

First Super CEO Bill Watson says insurance premiums will go up.

⇒ Energy Super
⇒ First Super
⇒ Catholic Super
⇒ Legal Super
⇒ Care Super

First Super CEO Bill Watson confirmed that insurance premiums for the fund’s 72,000 members would rise from July 1. The cost of death and disability cover offered by the fund will rise by 77 per cent and income protection will increase by 24.5 per cent.

Mr Watson said that eligibility criteria for disability cover would not change.

“We looked at tightening the eligibility requirements and the board decided not to because we wanted members to have quality cover,” he said.

“So, our premiums are going up.”

The blowout in First Super’s death and disability cover comes after Cbus and AustralianSuper each announced increases of more than 80 per cent last year.

Two other super funds – MTAA Super and HESTA – recently announced increases to death and disability cover of 110 per cent and 35 per cent respectively.

But in a departure from the recent spate of hikes, The New Daily understands that from May 30 AustralianSuper will lower premiums on death cover and income protection by around 20 per cent.

However, the cost of disability insurance will not change.

Why is the cost of insurance going up?

APRA is concerned that super funds previously negotiated pricing and policy terms that have contributed to the financial underperformance of insurers.

While this might have been good news for super members in the past, the regulator has cast doubt on whether many existing arrangements are sustainable because of a blowout in members making disability claims.

Insurers and super funds cite litigation firms that specialise in preparing disability claims as one of the big drivers of the claims spike.

There is also a capacity problem in the group life market, with insurers now less able to reinsure against losses on claims made by super members.

An increase in mental health-related claims caught the group insurers by surprise.

APRA found that nine of the 16 insurers it surveyed earlier this year said they required extra capital to support their group life businesses.

According to the official data published this week, insurers providing group disability cover for super funds generated total losses of $51 million in the 12 months to the end of March.

“The main source of loss for direct insurers has been through policies issued to trustees of industry superannuation funds,” APRA told insurers in an official letter sent this week.

“Several insurers reported profits on a net basis, but ceded substantial losses to their reinsurers.”

The bottom line for super members is that pressure is mounting on insurers to negotiate more profitable deals with super funds.

In other words, premiums will probably continue to rise and policy conditions are likely to be tightened further for disability cover.

Premium rises likely to slow

Chant West’s head of research Ian Fryer believes the cycle of large premium increases is coming to an end, but pressure will remain on insurers to match risks with returns.

He says super funds might be able to limit future premium increases by tightening eligibility criteria for members making claims, but that individual funds are likely to take their own approaches.

“If a fund doesn’t deal with amending eligibility criteria and conditions of policies then premiums will increase,” Mr Fryer said.

“If the criteria are changed then premium rises may only be modest or not go up at all.”

Mr Fryer said that another big change to insurance arrangements among super funds is a likely shift away from lump sum payments to people who make successful disability claims.

Many funds are now considering replacing lump sum payments with income streams, he says.

REST chief executive Damian Hill backed up this observation.

“Problems with benefit design around lump sum payments is causing lots of super funds to consider a move to income-type benefits,” he said.

Mr Hill said that the dramatic repricing of premiums and capacity problems in the insurance market had led to permanent change in the way insurers interacted with superannuation trustees.

“It’s now about trustees looking for the best long-term deal not just short-term pricing,” he said.

“Trustees are now more focused on the sustainability of insurance.”