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.

Rice Warner CEO, Michael Rice

Rice Warner CEO, Michael Rice: “Australia still has a large underinsurance problem”

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.”


  • BillB

    There is a barrow being pushed here on “under insurance ”

    NMG, the international insurance research organization, states in a paper dated Feb 24 2015, entitled “Flat insurance commissions: will it improve customer outcomes ” that

    ” As we have highlighted previously, contrary to the popular view, Australians have considerably more life risk cover per head ( excluding annuities and investments ) than any other developed market ”

    ( go to ) and look under “Newsletters ”

    I have seen comments like Mr Rice’s before-sometimes from insurers, some times from the AFA & FPA.

    I smell a rat, and its spelt ISN. The giveaway is this statement

    “Meanwhile, thanks to mandatory superannuation, life insurance is booming in Australia,” continued Mr Rice.

    Who commissioned this work – the ISN ? They have a vested interest in convincing friendly Governments ( and, after last week, that’s Labor AND Liberal ) to make it easy for them to flog one of their biggest points of difference – so called cheap and cheerful DEFAULT insurance. It used to let the ISN demand better rates from insurers, until the default cover bubble blew up in their face and caused life insurers ( our friends ) to look for a profit gouge by kicking the advisers in the teeth.

    I will take NMGs advice any day in this debate-everyone else has an agenda.

  • Are you considered “Insured” even if you have a policy that is not likely to pay out when you need it to?
    Such as much of the default IP and TPD group super policies with so many “out” clauses they will never pay?
    Or many direct policies of all types underwritten at claim?
    Someone should be researching insurance policies for the public, maybe with a 5 star system for those who don’t understand the differences.
    You may be insured, but are you actually covered?

  • ken

    As long as people see an easy and cheap solution they will be drawn to it. With the assistance of some charming TV model pushing the product she knows absolutely nothing about having only just practiced reading the script 10 minutes before.
    How Gulliple are us human beings?? even my dog knows when he is being “conned”