Default life insurance cover in superannuation should remain opt-out says one major insurer, despite recent data revealing that a quarter of fund members are being charged fees for life insurance policies sitting in idle funds.
In a submission to a parliamentary joint committee inquiry into the life insurance sector, AIA Australia says that moving from an opt-out to an opt-in system for life insurance could result in more than 13 million fund members being left without protection and see a drop from 90 per cent of insured individuals to a low of 18 per cent.
"Default cover is a safety net and should remain opt-out. The deeply embedded relationship of insurance within superannuation means that the issue of underinsurance in Australia is now one of adequacy of cover, not whether individuals hold cover," AIA Australia argued in its submission.
"Careful consideration is necessary as reform could inadvertently exacerbate underinsurance issues, leaving many without protection."
Life insurers and superannuation funds have come under scrutiny after a series of life insurance scandals including poor claims processes and high fees being charged for default superannuation sold inside funds – particularly when an account is lost or lapsed.
The committee is tasked with considering whether the industry needs reform or more oversight by regulatory bodies the Australian Prudential Regulation Authority and the Australian Securities and Investments Commission.
Recent data from Rice Warner reveals that 25 per cent of super fund members who are paying premiums for life insurance policies, sit in funds into which no contributions had been made in the past year.
The actuarial firm also projects that a young white-collar worker in a fund with high premium rates will retire with 21 per cent less than a fund member who did not take out death, total and permanent (TPD) and income protection insurance.
'Could do better'
"The fact is that many of the funds are continuing to provide insurance cover to their members even when they haven't made any contributions over the last 12 months.That is a call to think about the appropriateness of who they are giving the benefit to and the cost of the benefit for that member," Rice Warner senior consultant Andrea McDonnell said.
"Some of the super funds could do better, and one of the things that our research has shown is that the situation is very dramatic for those members who take no action and they are at risk having a much lower retirement balance."
The Insurance in Superannuation Industry Working Group, which has representatives from a collective of bodies including the Australian Institute of Superannuation Trustees, the Financial Services Council, the Association of Superannuation Funds Australia and Industry Superannuation Australia, is developing reforms to improve insurance in superannuation for all members, including young people and those with inactive accounts.
"We are prioritising assessment of the appropriate level of cover for the various segments of superannuation account holders to ensure that the super system delivers appropriately to all fund members," ASFA CEO Martin Fahy said.
In another submission to the PJC inquiry, listed wealth manager ClearView argued that fund members should not be forced to take out life insurance but should be offered cover against death, accidents and illness on an optional basis.
However, other companies who sent submissions to the inquiry shared AIA Australia's view, with BT Financial Group and law firm Berrill & Watson saying that offering life insurance to super fund members on an optional basis would exacerbate Australia's underinsurance problem.
Against the backdrop of the Comminsure scandal, all three companies issued a "can do better" mark for claims handling.
The PJC will complete its report by next June 30.
