There have been numerous surveys and discussions on underinsurance in Australia in recent years. Sectors of the financial services industry are now aware and convinced this is a real issue, and have been working with their clients in an attempt to close the gap. The group insurance space is one of the most effective ways of addressing the gap, given the large number of people who hold insurance within superannuation funds.
While many superannuation funds have done a great job in educating their members on awareness of their insurance needs, group risk insurers can contribute significantly by working closely with funds. This article discusses the five phases of addressing underinsurance in the group risk industry.
Phase 1: Increasing default death and TPD cover
While educating members to apply for additional cover according to their individual needs is the ideal way to address underinsurance, the reality is that typically over 90 per cent of members stay on the default level of cover set by the fund. Therefore, increasing the default level of cover has been an effective way of addressing underinsurance to date. Many industry funds have actively increased their default cover in the past few years.
While this result is encouraging, the shape of the cover may not suit some members' needs. Due to the traditional unitised design of level premium with decreasing sum insured, as a member ages the level of cover drops significantly for those aged 40 onwards. This is when the member is generally more likely to need cover, characterised by having higher debt levels and more dependants at this stage in their lives. The industry recognises funds can only increase default to a certain degree before some members are actually overinsured, especially for the young and single members. This leads to the next phase of addressing underinsurance.
Phase 2: Needs-based insurance
Phase 2 is about bridging the insurance gap for specific segments of membership, effectively changing the shape of the default cover across the various age groups. One way to achieve this is by introducing an age-based default, being lower units for young members and increasing units for members aged between 35-55 when they generally have higher levels of debt and dependants.
Alternatively, another way of supporting a needs-based insurance approach is marketing to specific segments of membership to encourage the take-up of voluntary additional cover. This can be in the form of a special offer campaign allowing members to increase cover with simplified underwriting.
Phase 3: Default income protection
While total and permanent disablement (TPD) cover provides members with cover for permanent disablement, many members are completely uninsured with respect to their income if they are temporarily disabled. Furthermore, TPD typically has a six-month waiting period as well as a longer claims assessment process. Income protection claims, on the other hand, usually have shorter waiting periods of one to three months. Many funds have income protection included within their benefit offering on a voluntary basis, however, the take-up rate to date has generally been low.
In addition to exploring ways to better educate and engage members on the need for income protection, introducing default income protection would be the most effective way of ensuring adequate coverage for members. Insurers should work with funds to set a basic level of default, while funds continue to encourage members to apply for cover above the default to adequately cover their income. Various benefit options could be implemented in this case, with the member having the ability to elect the appropriate option that best suits their needs.
Phase 4: Product enhancements
In recent years, insurance within superannuation funds has evolved from a one-size-fits-all approach to one with more flexibility to allow members to tailor the type and level of cover to suit their needs. Some funds allow members to take up additional lump sum and income protection cover without the need to provide health evidence upon joining.
In more recent times, lifestyle events cover is gaining traction within the industry, allowing members to increase existing cover at the time of a significant event when they are likely to need more insurance, for example, marriage, birth of the first child and taking out a mortgage.
Other enhancements include allowing members to fix their cover rather than having cover reduce as they age. Some even allow indexation of cover to keep track of inflation and salary increases.
Phase 5: Underwriting and technology
Once a fund has successfully encouraged members to apply for additional cover, insurers and funds have the task of lowering dropout rates during the application process. This can be achieved by:
. Short-form personal statements to simplify the process for members applying for a certain level of additional cover, and
. Engaging third-party specialists to actively follow up medical reports and provide mobile medical services and testing for the members' convenience.
Technology is definitely a key area insurers are focusing on to further increase the efficiency of the application process, including online underwriting solutions as well as tele-underwriting. Some insurers are now also providing funds with insurance needs calculators, which are useful tools to help members work out the level of cover required for their individual circumstances.
The above five phases, if executed appropriately by insurers and superannuation funds, will go a long way in reducing the level of underinsurance in Australia.
Michael Back is CommInsure's head of wholesale risk
