Money Your Super Insurance costs in superannuation to rise with new legislation
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Insurance costs in superannuation to rise with new legislation

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Older workers will find their superannuation insurance costs rising. Photo: Getty
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Insurance premiums within superannuation are set to rise as new legislation results in fund members dropping cover, industry researchers say.

Legislation making insurance cover within super an opt-in for inactive accounts and people under 25 will see total premium income drop by $400 million, said Mark Kachor, the managing director of research group DEXX&R.

That would represent an 8 per cent decline in group premium income in the insurance in superannuation area, following a $600 million decline for the year to March 2019, Mr Kachor said.

“If the group premium income falls by 8 per cent, for example, then companies will have to increase premiums by 8 per cent, meaning members will have to pay higher premiums,” Mr Kachor told The New Daily. 

Typically, super-related insurance premiums in an industry fund amount to $2 per week, so a 10 per cent increase would push that up to $2.10, or $109.20 a year. When income replacement is included, premiums can be significantly higher.

The healthy will leave

That pressure to increase rates is strengthened by the fact that young people opting out are the ones least likely to make a claim, leaving remaining members liable to cover higher payout ratios with their premiums.

“If, for example, 5 per cent of members leave and they only account for 2 per cent of claims, then premiums would need to go up somewhere between 3 and 5 per cent to cover that,” Mr Kachor said.

Under the Protecting Your Super bill (PYS) reintroduced to Parliament after the election, those under 25 and those with balances below $6000 will have to opt in to get insurance in their super, rather than get coverage automatically unless they opt out, as has been the case.

The negative result for insurers could be greater than the simple arithmetic calculation of numbers dropping cover.

Actuaries Willis Towers Watson (WTW) recently estimated that those choosing to opt in will be the people who are most likely to make a claim because of ill health or dangerous work.

“While most insurers appear to be initially pricing for 5 to 10 per cent of inactive members opting into insurance, we are observing several funds with actual opt-in rates around 20 per cent,” WTW said in its report.

That would mean higher costs for insurers as the relative number of those claiming on their insurance increases.

Quick action imperative

“Published information, together with our experience negotiating for a number of funds, suggest increases averaging 5 to10 per cent for death, 10 to 20 per cent for TPD (total and permanent disability) and potentially even larger increases for income protection cover. The overall message is that PYS does affect premiums and, by and large, premiums are increasing,” WTW said.

Super funds will need to act quickly to raise premiums to ensure premium rises remain as low as possible.

“Funds must also remember that deferring premium increases will only make the inevitable premium increase larger,” WTW said.

A 10 per cent premium increase implemented at July 1 could potentially become a 15 per cent premium increase on January 1, 2020, in order to “repay” the insurer for increases back to July 1.

“This can be considered a ‘deferral effect’ in 2019 and 2020, but allowing a 15 per cent increase to run indefinitely is not justified,” WTW said.

The New Daily is owned by Industry Super Holdings

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