A greater focus on risk insurance by financial advisers and superannuation fund trustees coupled with the growth of the direct life insurance market has helped reduce Australia's life insurance gap in the past six years, an industry report has found.
A report from Rice Warner Actuaries found that at June 2010, the level of underinsurance was $669 billion, compared with $1 trillion in 2005 on a like-for-like basis.
Rice Warner Actuaries director and head of life insurance Richard Weatherhead said the shift was attributed to significant demographic, financial and life insurance market changes over the past six years, in particular, an increased focus on personal financial risks post the global financial crisis (GFC).
"Increased levels of personal insurance have been driven by an increase of default cover within superannuation, a greater focus on risk insurance by financial advisers and superannuation fund trustees as well as the growing direct life insurance market," Weatherhead said.
"As an industry we've done quite well in pushing insurance levels up to at least meet subsistence, however, we're still only at about 50 per cent of [needs]."
He said the adviser market had done well in tackling the needs of the clients it actually advised.
Since the GFC their concern about personal security and risk had increased so insurance levels had risen.
However, while the report does provide some positives in light of Australia's continued struggle and frustration with its underinsurance problem, the reduction does not mean Australia is out of the woods just yet.
"The key message is the industry is not well and we've bridged the gap to a certain extent, but there is still some way to gain," he said.
"While the market is now providing a substantial proportion of subsistence life insurance cover, this is still only half the amount of cover required to ensure that family members and dependants can maintain their standard of living after the death of a parent or partner."
As well as individual disadvantage, underinsurance brings with it a substantial cost to the government.
Weatherhead said the total cost to government of life underinsurance for Australia was $140 million per year.
"Meanwhile the situation regarding disability underinsurance is even more serious, costing the government nine times this amount," he said.
He said if more Australians were properly insured, there would be a great cost saving, particularly for government.
If everyone was properly insured with total and permanent disability (TPD) cover, the government could save about $1.2 billion a year, he said.
He said the underinsurance issue would benefit from the government considering the removal of stamp duty from all life, TPD and income protection policies, removal of goods and services tax on TPD and income protection products sold by general insurers, equalisation of the tax treatment of risk insurance inside and outside superannuation, and implementation of the proposed scaled advice model with a focus on risk insurance.
