Reasons for increase in group insurance premiums

The cost of group life insurance (life insurance through super) has been on the rise, and an APRA letter released in 2015 details why.

Group insurance, or life insurance through super, has been singled out by the Australian Prudential Regulation Authority (APRA) over concerns of poor claims experiences by policy holders. A premium shortfall in the sector was identified due largely to higher numbers of claims and increased litigation action by lawyers. As a direct result, the cost of life insurance through super rose, although premiums are now expected to settle in order for them to remain affordable.

What is group life insurance?

There are several different ways that you can buy life insurance, including through a financial adviser or directly by yourself. Another way to buy life insurance, total and permanent disability insurance (TPD), and income protection insurance is through your superannuation fund via a group life policy.

Being a group-based policy, the underwriting requirements are quite different to an individual policy that you might purchase. Often a base level of cover is available with little or no underwriting. While this can be a great benefit for workers, it can also lead to a great risk of claims for the insurers – in this case, your superannuation fund.

How to buy life insurance
How to buy life insurance

Reason for group insurance premium shortfall

After writing to all direct insurers and reinsurers involved in group insurance in late 2013, APRA followed up and met with the CEOs of insurers involved in group insurance in early 2014.  It requested information on a summary of experience over the last three years and details of actions taken in the light of that experience.

From those responses APRA advised that the most common factors for the difference between the original pricing of insurance premiums and the claims experience were as follows:

  • Unemployment/underemployment and adverse changes in the economic environment, providing greater incentives for members to claim
  • Increased member awareness of insured benefits (due to government, scheme and lawyer promotional activity)
  • Increased lawyer involvement in the claims process
  • Increase in mental illness/stress-related claims (and for GSC these claims tending to be of longer than expected duration)
  • Increased automatic acceptance limits
  • Generous terms and conditions (including weaker eligibility and underwriting) leading to increased anti-selection by members)
  • Increased prevalence of large, late-notified claims (many of which are associated with increased lawyer involvement in the claims process)

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Changes to group life insurance

According to APRA, most insurers advised of changes to claims assessment procedures and resourcing in response to the recent experience in the group insurance market. While many different actions were described, common changes in relation to claims management were:

  • Increasing focus on early intervention and rehabilitation
  • Increasing focus on mental health issues
  • Increasing staff training
  • Increasing resourcing in the claims department
  • Better forecasting of future resourcing requirements
  • Reviewing claims processes more frequently
  • Making system enhancements
  • Enhancing claims reporting
  • Establishing service levels for turnaround times on reinsurance referrals
  • Utilising additional specialist medical officers

What it means for workers

The premiums charged by insurance companies ideally need to cover the insurance claims payouts and the cost of assessing and administering those claims. If a greater volume of claims are being experienced, then logically premiums will need to rise.  In order for premiums to remain affordable though, superannuation Trustees may try to strike a balance between tighter insurance conditions and price.

It’s a good idea to pull out your superannuation statement (or jump online and access your super account) from time to time to check just what group insurance you have, as well as the insurance conditions and the premiums you pay. You can read CANSTAR’s latest Superannuation Star Ratings Report here.

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