The federal government's Stronger Super package has validated the role of insurance within super by mandating that all default funds must have a risk insurance strategy and members must select to opt out of, not opt in to, insurance.
Its support for default insurance is recognition of the vital role insurance within super plays in addressing Australia's chronic underinsurance problem.
Research by Rice Warner Actuaries recently found that as many as 95 per cent of super fund members are covered only by the default level of coverage within their fund.
Under the reforms, the provision of a default level of cover for all members effectively creates a cover safety net to catch those members who are not actively managing their insurance.
While some insurance is better than none, a one-size-fits-all approach also means some members may still not have adequate levels of cover to suit their needs.
Being clear on the benefits
The underinsurance message to members is well trodden, and while members understand why they need insurance, there are barriers preventing them from taking action to improve the situation.
For members, the benefits of including insurance in their super should be clear: cost and simplicity.
Members may be able to achieve cost savings due to tax implications related to taking out insurance under super. Combining insurance within super generally leads to less complex underwriting processes, which can be leveraged in a group insurance environment.
Despite these benefits, members may perceive the complexity of the underwriting process to be too great.
This opens the door for insurers and funds to cut the red tape and make it easier for members to engage and opt for more insurance.
Using a life-cycle approach to insurance
In recent years, many super funds working with their group insurer have commenced a journey to improve insurance offerings by aligning coverage with a life-cycle stage approach.
This approach recognises that members have different insurance needs at different points in their lives, for example, when starting a family or nearing retirement.
A greater understanding of members has led to more appropriate matching of cover with member needs on a default basis.
For instance, younger and older members with fewer liabilities have their cover increased and decreased over time respectively.
Those in the middle-age groups who have greater coverage needs due to family responsibilities, for example, receive proportionately higher levels of coverage.
The fund's insurance design adjusts its members' level of insurance automatically with the aim of accommodating transitions through the life cycle.
While most funds have configured their insurance strategies to this type of model, some are more advanced than others.
Also, while this approach helps to tailor the default offer to a general understanding of members' needs, it does not mean members' individual cover needs are being met.
The challenge to increase individual engagement
In the past, the mode for encouraging members to increase their insurance through super has generally relied on special offer direct marketing campaigns or wholesale default benefit design changes.
In our experience, traditional direct marketing campaigns typically yielded a 1 per cent to 2 per cent response rate, and even to achieve those figures was considered a success.
Recently, however, there has been a concerted effort by insurers and funds to engage and target members through channels that are appropriate to them.
This has included bringing more services online and increasing engagement with members on their insurance needs when receiving calls through their member services teams.
Recent direct marketing campaigns conducted with two of our superannuation providers using this approach saw a take up rate of about 5 per cent.
Using AIA Australia's online tool to simplify underwriting and show how insurance can be flexible to suit member needs, the number of applications from members looking to increase their insurance cover more than doubled on a year-on-year basis.
This is a strong demonstration that members are prepared to engage in insurance through the right channels and if we make choosing the right level of cover easy.
Where to from here?
Stronger Super presents an opportunity for funds to define their insurance strategy; this could be through simply offering the base safety net insurance, becoming a provider of needs-based insurance at the life stage and/or at the individual level encouraging members to increase their cover appropriate to their circumstances.
The dilemma with default cover is striking the balance between offering an adequate level of default coverage, with affordability on a prescribed basis.
Member insight and engagement is the key issue and answer.
For superannuation funds and their group insurance partner, the focus needs to be on continuing to understand and engage with members in a meaningful way to provide cover on an opt-in basis over and above the default cover.
This means ensuring members are aware of their cover needs and making insurance through super more accessible and simple.
This will require funds and their group insurance partners to really delve into the needs and characteristics of their membership base.
They will need to identify the appropriate strategy for setting a balanced level of default cover and also identify the most effective way to reach out to members who don't fit the default cover mould to ensure they have the right cover for their needs.
Damien Mu is chief distribution and marketing officer of AIA Australia.
