Damien Mu, CEO of AIA Australia, says the bill will create an ”insurance underclass”.
by James Fernyhough
Life insurance giant AIA has sent a letter to all senators urging them vote down aÂ bill that would abolish default life insurance offered through superannuation for people under 25.
The “protecting your superannuation” bill, which is scheduled to go before the SenateÂ on Tuesday, is designed to protect younger and low-balance super members from having their account balances eroded by unnecessary or excessiveÂ life insurance premiums.
In the letter circulated to all senators on Thursday, AIA chief executive Damien Mu claimedÂ the legislation would create an “insurance underclass”.
“By removing default cover from the young and those with low balances, the government is creating an insurance underclass that will have serious social and economic consequences,” the letter read.Â
Former financial services minister Kelly O’Dwyer was the minister responsible for the ”protecting your superannuation” bill. Alex Ellinghausen
“Everybody should have equal access to a safety net of insurance cover, without discrimination on the basis of age, occupation or wealth.”Â Â
At present, default MySuperÂ products automatically include group life insurance policies for all members, the premiums for which come out of the members’ retirement savings. Members are free to opt-out, but high levels of disengagement means most do not.
In extreme cases, some fund members have seen these insurance premiums eat away their balances entirely. The bill aims to address this problem by banningÂ funds from providing opt-out insurance for members under the age of 25, with balances below $6000, or with inactive accounts.
The bill would have a major impact on life insurers, with conservative estimates predicting it will snatch away aboutÂ 15 per cent of their group premiums. In AIA’s case that would see a reduction of hundreds of millions in premiums.
But Mr Mu insisted this was not why his company was opposing the changes, tellingÂ The Australian Financial ReviewÂ AIA would make up the loss in part by raising group premiums, and in part by increasing premium intake through direct and advised distribution channels.Â
Assistant Treasurer Stuart Robert took responsibility for superannuation when Kelly O’Dwyer was moved to the workplace relations portfolio. Andrew Meares
“I’m not concerned about the impacts [of the bill]Â on profits,” heÂ said.Â
“That will be made up. I’m absolutely confident that the demandÂ is there and we have other mechanisms to provide life insurance, and which we do. So there’s the market. All I’m saying is that the bill is going to take away valuable life insurance that is far more efficient for Australians.”
Mr MuÂ said group life insurance paid out 81ÂąÂ for every dollar of premiums paid, compared to around 35ÂąÂ in the dollar paid out through direct insurance. He said the group of super members excluded under the new rules were currently in receipt of around $1 billion in claims payments, and that this money would have to be made up elsewhere,Â possiblyÂ by the government.
“The engagement the government has had with the industry on this bill has been very poor. The industry is highlighting to government some significant concerns around unintended consequences here,” he said.Â Â
Mr Mu said the life insurance and superannuation industries, through the Insurance in Superannuation Working Group, had been working on an alternative proposalÂ that he claimed would “achieve the outcomes sought by the government without the resulting costs to consumers and to the group insurance system”.
The proposal, which is supported byÂ retail and non-profit super funds as well as the life insurance industry,Â recommendsÂ a 1 per cent premium cap rather than excluding young and lowÂ balanceÂ membersÂ from default cover.
The Financial Services Council, the peak body for the life insurance industry, has supportedÂ Mr Mu’s call for further consultation.Â
“The FSC supports initiatives to address the inappropriate erosion of super balances as a result of some insurance arrangements. However, we believe that there will be unintended consequences arising fromÂ the government’s package, especiallyÂ for high-risk workers with young families,” an FSC spokesperson toldÂ The Australian Financial Review.
“We are also concerned aboutÂ the extremely short transitional arrangements that have beenÂ proposed.”Â