Australia’s Underinsurance Gap Explained

While Australia’s underinsurance gap appears to be closing, the bottom line is that Australia still has a large underinsurance problem, says Rice Warner CEO, Michael Rice.

In a concise analysis, which focuses on life insurance issues particularly within the superannuation sector, Mr Rice initially notes that 2015 has seen some closing of the life insurance gap, thanks to mandatory superannuation and improved group life insurance policies.

“But the problem of underinsured member lives persists,” adds Mr Rice, which he says presents continued opportunities in areas such as:

• Technological innovation
• Enhanced member engagement
• Some new thinking
• Further investment by superannuation funds

When first reporting on underinsurance in May 2005, Mr Rice said the average young family in their mid-thirties with young children had only 15% of their life insurance need if they relied on the default cover within their superannuation fund.

“Since then, default levels of cover have grown significantly and the gap for the typical young family has partly been closed,” said Mr Rice. But he continued that while the average required life insurance for that family is now approximately $680,000 ($500,000 in 2005), the typical default cover in 2015 is approximately $200,000 ($70,000 in 2005), “… so the base cover has doubled to approximately 30% of their need,” he said.

Mr Rice continued, “For their part, Australia’s superannuation funds have tried to target life insurance benefits better, by recognising that:

• Default levels were too low for too long
• Single people generally do not need as much life cover as families
• Buying a house and having a child are the key times when members are interested in life insurance
• Many young people have a higher need for disability cover than death cover
• The amount of cover should fall for many older people as they pay off their mortgages and have accumulated savings (family home and superannuation)

Mr Rice noted that all leading superannuation funds now have calculator tools to assist members supplement their cover to meet their own personal circumstances. “But, these are passive and rely on members to activate them – so usage is far too low,” he cautioned.

“Meanwhile, thanks to mandatory superannuation, life insurance is booming in Australia,” continued Mr Rice. “Some 50% of the $14 billion of annual premiums in the life industry is now collected through superannuation. Group insurance schemes today pay life insurers nearly $5 billion in premiums which is a staggering 10 times the amount collected 20 years ago,” he said.

Concluding his remarks, Mr Rice noted, “Some argue that this growth in life insurance is starting to take too much away from members’ retirement savings; others point out that life insurance within superannuation is cost effective and fills an important social need. The latter argument is strong, provided the premiums provide the right amount of cover.”