Insurance industry faces hard choices over group cover
On the Cancer Council’s website is a document entitled “Rights, Responsibilities and Tips for Employees”, offering advice to cancer sufferers about how to deal with colleagues, taking time off work and potential discrimination in the workplace. It also offers advice about applying for life insurance and claiming benefits.
Given the horrible and deadly nature of the disease, it is a highly sensitive issue, but nevertheless the Cancer Council’s advice highlights some of the challenges facing the life insurance industry.
The document points out that if individuals take out their own life insurance policy, they would normally be required to complete a medical questionnaire. If they are upfront about their cancer, sufferers may be denied cover.
However, notes the Cancer Council, “it may be possible to get disability and death cover by joining a ‘group’ superannuation or insurance scheme, e.g. with your employer, union or credit union. In such schemes, you may be offered automatic cover without any health tests or questions.”
The document also points out that “many people do not know that they can claim disability beneﬁts from their superannuation fund or when they can get a payout of their contributions”, before going on to to say under what circumstances disability lump sum and benefits can be claimed and a suggestion to appeal against a claim should it be rejected.
It is hard to argue that a cancer sufferer shouldn’t try to gain access to life insurance, assuming they are acting legally. It is also hard to argue against improved consumer awareness, but the advice shows how large super funds can be targeted by people who are unwell, all because the funds’ business model is to provide automatic cover to members.
Currently the group life insurance industry as a whole operates on the assumption that about one in every 1000 members will make a total and permanent disability (lump sum) claim. That figure only needs to rise to every two or three in every 1000, for whatever reason, to throw the economics into disarray.
What is particularly concerning to super funds is the prospect that individuals with a pre-existing condition will find a way to qualify for their fund and hence life insurance cover, perhaps by working for an employer only casually, and then making a claim. Most industry funds and corporate master trusts make a conscious decision to leave the insurance door open to everyone, as they regard it as a key member offering. But, perhaps some of the eligibility criteria will need to be re-assessed, given the turmoil facing the industry. Figures from the Australian Prudential Regulation Authority show that in the three months to December life insurers lost a collective $153 million on group products, based on $1.2 billion of revenue.
The industry is responding by raising premiums. In February AustralianSuper, the country’s biggest industry super fund, wrote to its 1.1 million members warning them their life insurance premiums would rise sharply for the second time in less than 12 months. Premiums, which will increase by as much as 75 per cent to cover policyholders who fall ill or have an accident, would have risen even further but for a decision by the fund to lock in the rates for only 12 months.
So what to do to bring some calm to the sector?
Super funds may baulk at forcing members to undertake health checks, but they might require individuals to answer a questionnaire if they wanted additional cover. Funds might also tweak their policies so that they reduce the amount they are prepared to pay out in lump sums, but raise the amount they would be prepared to pay on an income protection basis. Super funds could also restrict life insurance to permanent employees, and reduce automatic acceptance limits.
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