CHART: Industry Super Fund Members Are Paying Increasingly Higher Insurance Premiums While Everyone Else Pays Less

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Industry super funds, long touted as the best performing vehicles for retirement savings, are increasingly paying a lot more than competitors when it comes to life insurance premiums.

The premiums for life insurance at not-for-profit funds increased an average 22.4% between 2011 and 2014, according to analysis by SuperRatings.

Compare that to retail master trusts which saw a fall in life insurance premiums of 2.3% and corporate funds which passed on an average 4.4% decrease over the three years.

Insurance through a fund is expected to be cheaper because a fund manager can negotiate bulk discounts from insurance companies who want the business.

However, this chart shows the comparisons across industry, retail and corporate funds, according to the independent superannuation analyst SuperRatings:

Chart by SuperRatings

Super funds are required to offer at least basic life insurance and there are significant tax benefits doing it through a fund rather than paying it directly yourself. Essentially, the premiums are paid with before-tax money from a super fund.

By how much the increasing insurance premiums have eroded dollar returns to industry super members hasn’t been calculated by SuperRatings.

One factor in the premium rise for industry funds could be that pay-out ratios (the percentage of claims paid compared to the premiums collected) increased from 53 cents in every dollar in 2010/11 to nearly 65 cents in 2013/14.

However, SuperRatings CEO Adam Gee says research shows much of the increase follows significant discounting by insurers vying for key superannuation accounts during 2010 and 2011.

Anecdotal evidence suggests funds did not pass on premium reductions to members but instead gave increased levels of cover for the same cost.

And now the funds are being hit with significant premium increases at the end of the cheap honeymoon period.

SuperRatings Executive Manager, Consulting, Wendy Tse, says there’s no doubt insurers are being far more selective in the tenders they respond to.

“Evidence suggests that a number of funds have been left to negotiate with only their incumbent insurer in the current market, making it even more difficult for funds to achieve positive outcomes for their members,” she says.

“Many funds have strived to provide the most attractive insurance benefits possible, offering the highest levels of cover, incorporating broader definitions of disablement and requiring minimal underwriting to ensure as many members can obtain insurance as possible.

“Whilst this is a valiant attempt to act in members’ best interests, it has potentially worsened claims experience and pay-out ratios, adding further fuel to an already challenging environment.”

The funds are potentially faced with further rises in premium costs.

The average return for a not-for-profit is 8.45% compared to 6.61% for retail funds over 25 years, according to a Mckell Institute study conducted by Macquarie University.

The data analysed by SuperRatings includes insurance premiums of 390 superannuation products representing in more than 150 superannuation funds incorporating life insurance.

The research included an assessment of premium rates across a broad segment of age groups, starting at age 20 through to age 60.

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