The evolution of disability insurance within superannuation

Disability cover has received considerable media attention recently which has led to significant analysis and review from superannuation funds and their insurers (and reinsurers) on several key issues. Here, Senior Consultants at Rice Warner, Geoff McRae and Andrea McDonnell, outline the issues and the future of this evolving provision.

All MySuper products and many Choice products provide death and Total & Permanent Disability (TPD) cover. Some funds also offer income protection (IP) products which pay an income to partially replace wages on becoming disabled.

A study by SunSuper showed that about 36% of successful TPD claimants were returning to work following recovery from their disability with other funds reporting similar results without the same detailed analysis carried out by SunSuper.

These results raised the obvious question of whether members' premium payments were being used to pay genuine claims.

Lump sum TPD payments receive favourable taxation treatment compared with monthly disability income payments. However, the lump sums are generally being applied to take the place of income no longer able to be earned by the disabled member. This raises questions as to the adequacy of the lump sums and the need for customised advice for each claimant on how to effectively deal with the lump sum.

There have been examples funds offering opportunities for anti-selection such as:

• Allowing past recipients of terminal illness and/or TPD benefits to re-enter funds and be provided with further unrestricted TPD cover.
• Allowing new fund members to take out significant amounts of additional cover with little or no requirement for the applicant to be "actively at work".
• Continuing the provision of standard TPD cover for members who have been potentially unemployed for a significant period (as evidenced by cessation of contributions).

Only recently have insurers in the group market sought to consider rehabilitation across a broad spectrum of disability claims. It had previously been used quite selectively with its use being limited by the late notification of claims.

With an upgrading of processes to encourage early notification of claims, its wider use is being trialled by most insurers. The main initial focus has been on disability income claims rather than TPD claims.

With limited awareness among members of the death and disability cover provided by superannuation funds, many claims are not notified to the fund and its insurance company until many years after the claim event. This has presented significant issues in sourcing appropriate medical and other evidence to allow the assessment of the claim and the eligibility of the member for the cover at the time of the claim event.

Bad publicity of high decline rates

2016 was a year of significant adverse media attention on death, disability and trauma insurance coverage.

This media attention has:

• Led some fund members to question the value of their insurance cover.
• Influenced the outcome of some industry fund insurance tenders.
• Highlighted the wide range of methods used by insurers in determining the proportion of claims being declined. Following the ASIC research referred to above, one insurer was reported to be declining 37% of its disability claims. On further investigation, it was found that the insurer was using a much broader definition of "disability claim" than any other insurer in the industry. Many of its declined claims would not have been considered to be claims by other insurers. This example highlights the need for a standardised approach to recording claims as well as a standard method of counting the time from when the claimant initiates the claim process to when the claim is paid or declined.

Affordability of cover

Significant increases in premium rates since 2013 have put a greater focus on:

• The degree to which superannuation savings are being reduced by insurance premiums.
• A reasonable balance needs to be maintained between initiating cover (and keeping cover in place) for different groups of members and the impact that the premiums have on superannuation savings.
• The equity of the premiums being charged to different groups of members.
• There is now a greater focus on identifying cross subsidies between different member groups and considering whether this is appropriate.

The industry response

Many issues have been raised by the media concerning the management of TPD benefits provided for fund members. Not surprisingly there has been a multi-faceted response from the industry. Important elements of this response include: 

• Updating the TPD definitions with aim of making them more closely aligned to the best interests of all members
• Strengthening the risk control provisions in policies
• Modernising claims management processes
• Amove to paying TPD claims by instalments and consideration of greater co-ordination of TPD and disability income benefits
• Improving member communication facilities; and
• A greater focus on the cost of insured benefits to different groups of members

The future

Disability cover in superannuation is an evolving provision. The disruptions in the group market since 2013 have led to a lot greater degree of analysis of the drivers of the claims experience with the main responses being the tightening of TPD definitions, the increasing risk controls, the move to pay TPD by instalments and the greater use of rehabilitation and retraining aligned with early notification strategies, in some cases co-ordinated with employers and workers' compensation providers.

It is expected that the payment of TPD by instalments will expand and in time will lead a combination of TPD and disability income provisions in some funds.

The actual insurance provisions and processes will be more tailored to the circumstances of particular membership groups within funds.

Already, we are seeing large funds establish significant partnerships with their insurers, recognising that it is the interests of both to build a sustainable insurance business which provides good value for all members.

We expect a transitional period for the superannuation industry before benefits are better aligned to member needs and insurance becomes more profitable.

The full and original version of this article, containing further detailed information on this issue and the industry response, can be found here .