Australia’s superannuation system has ensured widespread income protection coverage. A lot can be learned from this market, both positive and negative, explains Russell Higginbotham, UK and Ireland CEO at Swiss Re.
The weather’s a lot colder, the beer’s a lot warmer, I’m back to calling my ‘thongs’ by their correct name of ‘flip-flops’ for fear of embarrassment and the bronzed six-pack I promised myself never did materialise. I returned from a pleasant four-year Sydney hiatus back in 2010 and, though I’ve never looked back, there are many things that made a lasting impression on me.
Aside from the benefits of far more space, a better climate and less ‘rain stopped play’, the Australian group risk system is one area where we could learn a thing or two from our colleagues on the other side of the world.
Whereas the UK only brought in auto-enrolment for pensions just over twelve months ago, the introduction of compulsory superannuation for all Australian employees back in the 1990s has been watched closely by many observers – not least by me. This compulsion doesn’t only cover pension saving, it also helps ensure all employees receive a minimum level of life cover and a competitive environment allows more protection products to be accessed at a reasonable rate by employees.
All employers make a minimum contribution equal to 9.25% of each employee’s salary to their nominated superannuation fund and, in many cases, protection cover is ‘paid for’ from the fund. The different superannuation schemes try to attract people to their plan with increasingly inclusive death, total and permanent disablement, and income protection cover for Australia’s employees.
There are a number of types of superannuation scheme, but there are two main sectors. Not for profit outfits seek to help members manage their superannuation’s growing balance, while keeping costs down, for an optimal outcome at retirement. Commercial schemes seek to attract members by offering more sophisticated investment options, but the advice they provide comes at a fee. With the balance of funds under management standing at AUD1.6 trillion (GBP 0.9 trillion) in superannuation schemes*, the fact that there is significant competition for members isn’t surprising.
The sheer scale of the schemes enables insurers to tender competitively for benefits and the results are staggering. For the 11.5 million people working in Australia, there are 9.7 million total permanent disability covers and 4.9 million income protection / salary continuance policies – and virtually everyone in employment has life insurance. It’s questionable whether, at an individual level, the cover is adequate or appropriate but there is no argument that a huge number of people have a level of cover they may not have otherwise.
In addition to this, some employers offer additional benefits over and above that of the superannuation scheme to attract employees. Similar to the UK, employers provide access to cover, either as part of a remuneration package or to purchase at preferential rates.
Inforce group insurance totals nearly AUD 4 billion (GBP 2.25 billion) in premiums, with group salary continuance accounting for over a quarter of this and the rest being made up of lump sum cover**. Some of these are through enhanced default benefits and some are from the additional top-up options, but this puts the UK’s GBP 563m equivalent income protection group market*** – covering nearly two million lives – into the shade.
These figures suggest that, in a country with just over a third of the UK’s population, the number of people covered in group arrangements is more than double that in the UK. Whereas the UK market often restricts benefits to higher earners or by management grade, Australia covers a wide range of the population, including lower earners. While it’s likely that many members of superannuation funds do not consciously select their fund for the insurance, many people are covered because of the compulsory nature of superannuation and at a lower cost than if they went directly to the market.
This phenomenal market stems from the roots of small, baseline benefits in its early days to the remarkably competitive system that we see today. Between June 2000 and June 2011, assets rose by 170%**** as new rules were brought in to encourage growth. Consumer / employee-beneficial regulations have helped create such an environment, but it could be argued that this has come at a price.
The superannuation environment has grown significantly, and particularly the not for profit segment. There has been much consolidation of funds to achieve greater efficiencies. This means that insurers and reinsurers have supported higher and higher automatic acceptance limits for cover without medical underwriting. There is some concern that, as the cost of income protection is greater than that of lump sum cover, the erosion of the members’ retirement balance is too great a cost.
Further, there have been some difficult times in Australia’s life and health market of late. Reinsurers and insurers have been hit by historical claims that have caused some concerns about the future of the market. It could be argued that the system has successfully protected the consumer and that this is exactly what insurance is for. But factors such as limited access to data increase the risk that frequent losses would become unsustainable very quickly.
It will be interesting to see how the market adapts to these events and what effects it will have on some of the group product innovation that’s been taking place. One example of such innovation is the link disability and life insurance benefits have in some schemes with DC pensions, both as income and lump sum benefits.
As we move to soft compulsion for pensions through auto-enrolment, there are many things that we could learn from Australia’s system – both the positives and the negatives. Increased awareness of how the industry could raise appreciation of a need for, and even increase the sales of products like income protection. But we should continue our disciplined approach to risk management and grow at a manageable rate.
A new state of affairs
There seems to be increasing awareness that the state will not provide as much as previously during times of hardship. It’s up to the private sector – namely protection providers – to offer reassurance where it has not been previously, providing it makes economic sense. Yet it will take a major mind-set change among certain types of employers if the potential of the group market is to be realised.
In Swiss Re’s research for last year’s Insurance Report, 63% of employers say that it’s not down to them, but it’s instead the individual who should be responsible for life and health benefits. Of those who do not currently provide income protection or make cover available for their employees, just 21% would be willing to change this situation. My esteemed colleague, Ron Wheatcroft, will supply more detail on this side of things in his article, but the challenge we face is not straightforward – not that any are!
There are some in the doubters’ camp who think that struggling employers will see auto-enrolment as an opportunity to reduce the pension coverage they provide to employees. Yet, if the insurance industry can demonstrate its worth to at least a small section of the employer community, wider change could arrive via the snowball effect.
It’s unlikely we’ll see a sudden overnight uptick in sales for income protection. And ‘copying and pasting’ the approach from the likes of Australia would be completely wrong, irrespective of recent experiences. We should learn what’s good from other markets, what doesn’t work so well and adapt it to our own environment and culture.
So let’s use the system of auto-enrolment to build awareness of the need for other products our industry provides. Let’s build the trust in the workplace that’s needed and then income protection will gradually become a ‘must have’ as more people realise the benefits. We shouldn’t waver, we shouldn’t let this opportunity slip and we definitely shouldn’t flip flop.
*Superstats, August 2013
**DEXX&R Life Analysis, quarterly statistics, ending June 2013
***Swiss Re Group Watch, 2013
****Ernst & Young, Superannuation Trends and Implications, November 2011
Russell is Chief Executive Officer of the UK branch of Swiss Re Europe S.A. and Market Executive for Swiss Re’s reinsurance business in the UK and Ireland.