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Insurance in superannuation: Impact of proposed Federal Budget changes

Insurance in super: impact of Federal Budget changes

In the 2018/2019 Federal Budget, the Government proposed a significant change to how default group insurance should be provided to certain cohorts of members across the superannuation industry. Utilising analysis performed by KPMG for the Insurance in Superannuation Working Group (ISWG) in September 2017, we have outlined the potential impact of these changes on funds and insurers.

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The proposed changes involve moving insurance within superannuation from a default framework to one that is offered on an opt-in basis for:

  • members with low balances of less than $6,000
  • members under the age of 25 years, and
  • members whose accounts have not received a contribution in 13 months and are inactive.

KPMG have assessed the potential impacts on super funds and insurers of the Federal Budget changes, utilising analysis performed by KPMG for the Insurance in Superannuation Working Group (ISWG) in September 2017.

Impacts

Our analysis highlighted the following overall impacts:

  • Adverse impact on insurance premiums due to reduction in Group Life insurance cover
    We anticipate a 50 percent reduction in the levels of Group Life insurance cover and a 42 percent reduction in insurance premiums collected. We believe this will have an adverse impact on insurance premiums, and could result in an increase in average Group Life insurance premiums of 26 percent across the industry.
  • Erosion impact on retirement outcomes
    From a retirement outcome perspective, the final impact is subject to the future adjustment to insurance premiums based on the proposed changes. Overall, if insurance premium rates are not increased as a result of these measures, then on average the erosion of projected retirement benefits due to default insurance premiums would reduce from 6.2 percent to 5.8 percent. However, if insurance premiums increase by 26 percent as we anticipate, the average level of erosion of projected retirement benefits deteriorates from 6.2 percent to 7.3 percent.
  • Disproportionate impact for females and low income earners
    As we highlighted in the September 2017 ISWG report, the most heavily impacted categories of erosion of benefits due to default insurance cover are females and low income earners. Our calculations highlight that these categories will be worse off under the proposed changes. For example, considering an increase in insurance premiums of 26 percent, we estimate the average erosion of account balances for females will increase from 7.6 percent to 9.0 percent and low income earners (<$18,200) to increase from 15.8 percent to 17.6 percent.

The proposed changes will have a material impact (both intended and unintended) for both superannuation funds and insurers. The impact will vary significantly by superannuation fund with a multitude of factors determining the overall change. KPMG expects all funds across the superannuation industry will need to invest a significant amount of effort in strategy, design, pricing and administration to implement the proposed changes – now is the time to think and plan ahead.

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