Mennen, Josh --- "Editorial: Tackling Australia's Underinsurance Crisis: Enhancing Financial Advice and Industry Reform" [2023] PrecedentAULA 48; (2023) 178 Precedent 2

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Tackling Australia's underinsurance crisis: Enhancing financial advice and industry reform

By Josh Mennen

Australian workers are seriously underinsured for death, total and permanent disability (TPD) and income protection cover, leaving them vulnerable to financial hardship.

According to the 2022 report commissioned by the Financial Services Council, Australia's Life Underinsurance Gap, approximately 1 million Australians are underinsured for death/TPD and 3.4 million lack adequate income protection coverage.^[1]

The reduction in superannuation group insurance, the only source of cover for many workers, has been a key contributor to the problem. Between 2018 and 2020, there was a 27 per cent decrease in death cover and a 29 per cent reduction in TPD cover, as highlighted in Rice Warner's Underinsurance in Australia 2020 report.

One significant cause was the well-intended reforms by the Morrison government that resulted in the loss of default insurance for under 25-year-olds, those with low super balances and inactive accounts. About 700,000 members of the industry fund REST lost cover due to these reforms, reducing the number of insured individuals and impacting premiums and benefits for those still covered.^[2]

The COVID-19 early release of super program further exacerbated the problem, with approximately half a million fund members losing default death and TPD cover after draining their accounts during the pandemic. Particularly affected were females and individuals with poor employment conditions, who are less likely to have insurance outside of super and, therefore, more vulnerable.

On the other end of the underinsurance gap, rising mortgage debt and living costs pose additional challenges. With record-fast interest rate increases, and many fixed-rate mortgages set to switch to variable rates, the financial consequences of an unexpected injury or illness are more severe for those without sufficient risk protection.

Addressing this crisis requires a concerted effort from all stakeholders including, crucially, superannuation fund trustees. They play a pivotal role in ensuring that default group insurance cover offers optimal value to members, considering affordability and suitability based on member demographics and work conditions. Positive trends, such as the legislated super guarantee rate increases to 12 per cent by July 2025^[3] and a growing insured member pool through record migration intake, can help mitigate premium erosion. Meanwhile, there is cause for confidence in default product offerings as more super funds drop the notorious ‘activities of daily living’ test that has been unfairly and retrospectively used to deny claims by workers in precarious and casual employment.

A potentially game changing opportunity lies in the federal Labor government’s endorsement of Recommendation 6 of the Quality of Advice Review.^[4] This will enable super funds an expanded role, providing tailored insurance advice to their existing members, many of whom are priced out of retail financial advice.

However, while enabling super funds to provide financial advice is a positive step in principle, it must come with strict regulations to ensure a customer-first approach and maintain independence and transparency. This should include, at a minimum:

• Limiting such advice to existing fund members in order to avoid widespread sales/hawking campaigns like that seen in the case of Westpac Securities Administration Ltd v ASIC,^[5] where Westpac companies called bank customers to recommend they roll out of their other super funds into Westpac-owned BT Super.

• Where the super fund is only able to advise on a narrow suite of insurance products, with any recommendation provided a clear comparison with an arm’s length benchmark alternative.

• Upholding the legal standard to act in the customer’s best interests.

While some super funds may express hesitation about entering the advice space, they run the risk of falling behind those who responsibly embrace an expanded role and deliver for members. If these initiatives work to mitigate underinsurance and enhance affordable financial advice services, Australia can take a significant step towards protecting its workers and promoting financial well-being nationwide.

Josh Mennan is a principal lawyer at Maurice Blackburn, specialising in superannuation, insurance, financial advice and credit law disputes. He sits on the Board of Autism Queensland and The McKell Institute.

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^[1] NMG Consulting, Australia’s Life Underinsurance Gap: Research Report (2022), 17.

^[2] See Treasury Laws Amendment (Putting Members’ Interests First) Bill 2019 (Cth).

^[3] Australian Taxation Office, The super guarantee rate is increasing (2023) <https://www.ato.gov.au/Business/Small-business-newsroom/Lodging-and-paying/The-super-guarantee-rate-is-increasing/>.

^[4] Australian Government, Quality of Advice Review (Report, 2022) <https://treasury.gov.au/sites/default/files/2023-01/p2023-358632.pdf>; S Jones, Delivering better financial outcomes – roadmap for financial advice reform (Media release, 2023) <https://ministers.treasury.gov.au/ministers/stephen-jones-2022/media-releases/delivering-better-financial-outcomes-roadmap-financial>.

^[5] [2021] HCA 3.