Who’s subsidising your insurance in super?

By Lucy Dean

July 24 2018
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Arguments against rolling back super for low-balance members on the grounds that it will trigger higher fees for other members highlight the system’s problems, the Grattan Institute has said.

In a submission to Treasury on the proposed changes to insurance in super, the SMSF Association said making insurance in super an opt-in choice for those under 25, those with inactive accounts and those with balances of less than $6,000 would disadvantage SMSF members who use APRA funds for insurance purposes.

CEO John Maroney said these funds are often below the $6,000 threshold and as such, without strong awareness campaigns, changes could adversely affect these savers.

The Australian Prudential Regulation Authority (APRA) went further, warning that the changes could come at a higher cost to high balance members.

In her statement to the Senate economics legislation committee, deputy chairman Helen Rowell said it was likely that the removal of lower balance members from the “default” insurance pool would create upward pressures on the premiums paid by the remaining members.

However, according to the Grattan Institute, this argument needs to be scrutinised.

In its submission to Treasury, the Grattan Institute’s John Daley and Brendan Coates said the aim of insurance should be to pool risk, rather than cross-subsidise.

“The current system appears to have very substantial cross-subsidies,” the researchers said.

“Analysis by both Rice Warner and KPMG in submissions to this committee claim that the proposed changes to default insurance would lead to large increases in insurance premiums. This strongly suggests that those who are young, have inactive accounts, or small balances, are cross-subsidising everyone else.

“It is not obvious why it is desirable for there to be an insurance cross-subsidy for those who are old or have large balances.”

The researchers said those under 25 are also less likely to need life insurance, given only 6 per cent aged 23-24 and in employment have a child.

Further, the exceptions don’t justify the argument against.

“Defaults should be appropriate for the bulk of those affected rather than less likely cases,” they said.

“Income protection and TPD insurance can be more relevant to under 25s. But it is arguable that many people – particularly those on lower incomes who are typically younger workers – would rationally prefer to rely on the social safety net of the disability pension in the unlikely event that they are unable to work as a result of an accident not related to employment (which would attract workers compensation benefits).

“And in the meantime their superannuation balances are not eroded.”

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