Superannuation’s default disability insurance highlights trustee failings
Insurance in superannuation is big business, generating billions of dollars a year in premiums.
The policies are automatically attached to superannuation funds for people aged 25 and over, and the money only stops if they actively decide to cancel.
While insurance companies say these policies provide peace of mind and financial support when things go badly wrong, thousands of their customers have a different view.
Carolyn Jenkins is one of them. She told the ABC she is battling both a serious illness and an insurer refusing to pay out on her superannuation fund’s total and permanent disability (TPD) cover.
“They don’t really see that there’s a person behind that decision, it’s just, ‘oh well, we’ll just stamp it, no’,” she said.
Ms Jenkins is one of around half a million Australians with a TPD policy, which consumer groups and the financial regulator warn are likely to be a waste of money.
These are policies that come with what is known as the activities of daily living (ADL) test, with hurdles so high that nearly two-thirds of applications are rejected.
“These people are paying premiums for basically junk insurance, and these premiums are reducing their superannuation savings,” explained regulator ASIC’s senior insurance executive Emma Curtis.
A test designed for failure
The activities of daily living test is, as the name suggests, a test to see if you can do basics like walk, eat, wash yourself, use the toilet, and so on.
You must be severely disabled to fail, which means many people who may not be capable of working, nonetheless do not get paid out their insurance.
That raises the role of super fund trustees.
By law they are required to act in the best interests of their fund’s members, but lawyers say many are failing in that duty.
“They should never agree to enter a policy that has activities of daily living in it, because that’s clearly not in the best interests of members,” said Carl Mickels, from Firth’s Superannuation Lawyers.
“It’s not insurance if only a few people who are disabled and claiming against their TPD policy ever have a remote chance of getting paid.”
ASIC has singled out Westpac and Asteron, which used to be Suncorp, as two companies with the highest decline rates.
Consumer group CHOICE says AMP and AON also figure prominently, as do not-for-profits including Intrust, Labour Union Co-Operative and Pubic Sector Super.
Cross-selling largely to blame
Superannuation trustees not doing their job was front and centre at the banking royal commission in 2018.
“It was particularly acute where the superannuation fund was engaging in insurance arrangements with its own corporate affiliate, and that is its own in-house insurance arm,” recalled Josh Mennen from Maurice Blackburn lawyers.
In other words, cross-selling products – and that is exactly what happened to Carolyn Jenkins, she had MLC super and MLC insurance.
Banking and financial services royal commissioner Kenneth Hayne summed up that type of integration like this:
“The entity’s motivation will usually be to increase market share, to increase revenue, to increase profit, to place commercial pressure on its competitors, or some combination of those factors.”
All the big banks and AMP have owned insurance companies and, even though some have sold out, they still have very close relationships.
“An insurance company will always go with the superannuation fund which it’s economically tied with, through maybe the parent company or whatever,” observed lawyer Carl Mickels.
Superannuation trustees say they have heard the message.
“Superannuation funds are taking this very seriously and looking at changing, so there are a lot of funds who are in the process of re-negotiating their insurance contracts,” said Eva Scheerlinck, the CEO of the Australian Institute of Superannuation Trustees.
This week the Financial Services Council, which represents for-profit super funds and life insurers, announced that temporary provisions to prevent workers who lost their jobs or hours due to COVID-19 falling onto the ADL had been extended from the end of September to apply to claims for illness and injury sustained before January 1, 2021.
COVID-19 likely to worsen problem
Trustees will be back in the spotlight with the expected rise in mental health issues caused by COVID-19.
For nearly half a million people, a TPD claim resulting from that could show their cover to be effectively worthless.
“People who have mental illness, solely as a reason for them being totally disabled, have no chance, because of the activities of daily living requirements,” asserted Carl Mickels.
Mr Mickels said, in many cases, trustees do not ask the hard questions of insurers to protect the interests of members.
But trustees say it is members who should be asking the questions.
“The vast majority of superannuation members are disengaged with their super fund,” said Ms Scheerlinck.
“You can have all the warnings on the website and the like, but people still need to engage.”
ASIC is watching and warns the onus is on trustees to seek out better policies for their members.