Productivity Commission notes flaws in group insurance

The report, Superannuation: Assessing Efficiency and Competitiveness, noted that many group insurance arrangements deliver much more affordable insurance than members would be able to get through individually written cover outside of super.

However, it said that the premiums that come out of members’ accounts erode their retirement balances, and that the effects are worse for members on low incomes and those with intermittent labour force attachment, who continue to have premiums deducted from their accounts while not contributing to their super.

Even worse, the report found that some members end up with insurance policies that are simply unnecessary.

“About 17 per cent have duplicate policies across multiple super accounts — eroding their retirement balances by over $50,000,” the report said.

“And some members are being defaulted into insurance products they are ineligible to claim on, with income protection cover being the chief and costly culprit for such ‘zombie policies’.”

The Productivity Commission also highlighted other questionable practices, including:

• extremely complex and incomparable policies, which impede member decision making and act as barriers to account switching and consolidation, and can derail fund mergers;
• member difficulties in interacting with funds, particularly to opt out of insurance and to make a complaint;
• the bundling of life and disability insurance, meaning that some members without dependants are unable to opt out of life cover while retaining their disability cover; and
• poor application of risk premiums in default insurance, for example, for occupation or smoking status.

The report pointed out the super industry’s development of a code of practice, but also highlighted its flaws in that it’s unenforceable, falls well short of what is needed and does not reflect best practice for an industry code of conduct.

“Its effectiveness will depend on the extent of voluntary take up and the strength of its provisions (which are yet to include standard definitions and a short-form annual insurance statement for members),” the Productivity Commission said.

“In its current state, it will only herald modest improvements in member outcomes.”

Adrian Flores

Adrian Flores is a deputy editor at Momentum Media, focusing mainly on banking, wealth management and financial services. He has also written for Public Accountant, Accountants Daily and The CEO Magazine.

You can contact him on [email protected].