Premiums for insurance through super could jump 26%
A new opt-in system proposed under the 2017/18 budget could mean fewer members, higher rates and eroded retirement funds.
Proposed changes to the 2017/18 federal budget could cause the price of life insurance through super to jump by 26% according to modelling by KPMG. The proposed changes would make this type of life insurance opt-in for select groups of members, including those with balances less than $6,000, those who are under 25 and those who haven't contributed in at least 13 months.
KPMG estimates that insurance cover will decrease by 50% overall as a result of the measure, leading to a 42% decrease in premiums collected. With fewer people opting in and less revenue flowing through the system, KPMG says the costs will rise for everyone else.
KPMG gives three reasons for the predicted premium increase:
- The members who will be leaving will be the younger ones who effectively subsidise everyone else because they are the least likely to claim. Without them, the overall risk of the pool is increased.
- In an opt-in system, it is natural for people who don't need insurance to decline the offer, therefore not helping to balance the risk among those more likely to claim.
- Fewer members means less revenue for insurers, while fixed costs remain the same.
Since premiums for life insurance through super are taken out of the super contributions themselves, any increase in premiums means a further erosion of retirement benefits beyond the 6.2% erosion that premiums are currently causing. KPMG suggests this erosion could increase to 7.3% if its projected 26% increase in premium costs turns out to be correct.
If the premiums don't increase within this new opt-in system, then the erosion will actually decrease to 5.8%. The KPMG report doesn't say why this would be the case.
Other research shows that consumers have a limited understanding of how insurance through super works. Some insurers are already trying to clarify their messaging around this product to make it easier for people to understand, and it looks like they'll have to ramp up their efforts even more if they want to keep customers under the new system.