Superannuation fund members wanting to boost their insurance coverage levels may soon be asked to provide health information, according to consultancy Rice Warner.

“It may be time for funds to cease offering cover above default except where at least some evidence of good health has been provided,” the group said in a new research paper.

The comments come after major banks and financial house AMP have reported losses on their group insurance businesses that provide bulk insurance cover to super funds.

“With group insurance claims experience being higher than had been expected over recent years, superannuation fund trustees have been reconsidering benefit designs and policy terms in order to ensure sustainability of the fund’s insurance arrangements,” Rice Warner says.

Currently the vast majority of industry and public sector funds allow members to boost their life and incapacity insurance cover without providing medical information. Private sector funds are less inclined to do so.

Insurance boosting options. Source: Rice Warner

The current low cost model of insurance in super is driven by the fact that funds can provide it without having to give insurers specific information on individuals wanting cover.

“Default cover on joining the fund is generally provided without evidence of health, for simplicity and because it has long been recognised that members who are first provided cover when joining an employer tend to be low risk as new employees are expected to be in good health.This makes it an important feature to retain,” Rice Warner says.

Further if all new employees receive the same level of benefit or the same benefit formula (subject only to age or salary differences) this reduces the risk of anti-selection, or those more prone to ill-health getting higher cover.

Since introducing insured benefits, many funds have been able to obtain generous options for their members from their insurers such boosting cover levels without scruitiny in situations like:

• On joining the fund (sometimes regardless of whether they are commencing new employment).
• On the occurrence of certain “life events” such as marriage, birth of a child.
• At certain ages or periods of membership.
• When transferring cover from another fund.

Many of these features were introduced when processes of applying individual scrutiny to requests to boost cover were complex and onerous.

“Processes are now simpler and quicker, with most insurers offering electronic underwriting and the use of the telephone to clarify issues. It may be time for funds to cease offering cover above default except where at least some evidence of good health has been provided,” Rice Warner says.

Overall Industry funds can be seen to be more generous than master trusts in providing additional cover without underwriting. This can increase the exposure of industry funds to an anti-selection risk, which in turn can lead to a worsening experience for the funds if they don’t act, Rice Warner says.

The tragedy of suicide

One area where funds can be exposed is

Few exclusions apply to death and total and permanent disability cover. For requests to boost cover, individuals may be offered cover subject to individual exclusions based on their medical history or pastimes.

“There is however a risk that members may take out cover with the intention of making a claim. Whilst underwriting may pick up existing illnesses, it is more difficult to determine which members are at risk of self-harm,” Rice Warner says.

Suicide claims are frequent, particularly amongst male members as demonstrated by Rice Warner’s 2014 claims experience study covering years 2010-2013.

Male suicides far outnumber the female experience.