Higher life insurance premiums 'likely' under government reforms: APRA
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Higher life insurance premiums 'likely' under government reforms: APRA

The government's plan to end automatic life insurance for young superannuation fund members and those with low balances will probably raise premiums for remaining members, the financial regulator says.

Life insurers, who stand to lose revenue under the changes, have also warned of premiums blowing out by up to 26 per cent, though consumer advocates dispute these claims and say the industry is seeking to muddy the waters for its own purposes.

Helen Rowell from APRA says "upward pressure" on premiums is likely.

Helen Rowell from APRA says "upward pressure" on premiums is likely.

Photo: Chris Pearce

As part of the budget, the government unveiled a plan to prevent superannuation balances being eroded by life insurance that may be of little value to some members.

Instead of the current "default" system where members automatically pay for life insurance unless they actively choose not to, the government's plan would mean members would have to "opt in" to receive life cover if they are younger than 25, have a balance of less than $6000, or have not made a contribution for 13 months.

There will also be limits on the fees charged on balances of less than $6000. Inactive accounts with low balances will also be transferred to the Australian Tax Office to prevent them being eaten up by fees.

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The Australian Prudential Regulation Authority's deputy chairman, Helen Rowell, told a Senate inquiry on Friday that transferring funds to the ATO would benefit members with low balances.

The insurance changes, however, would be a "significant shift", that would probably increase premiums for other members.

"The precise impact of the insurance proposals is difficult to assess at this time, however it is likely that the removal of these members from the “default” insurance pool (together with the removal of members with inactive accounts) will create upward pressure on premiums for the remaining insured members," Ms Rowell said before a Senate inquiry in Sydney.

Life insurers have campaigned against the change by pointing to "unintended consequences" for young people without insurance, and highlighting potential pressures on premiums.

MetLife told the inquiry the government's plan could introduce "instability" into the current insurance system, which had meant that insurance through super was generally cheaper than other forms of insurance.

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As well as cutting the number of members who paid premiums, the changes could also lead to super funds spending more money encouraging their members to actively take up life insurance, it said.

"These factors will lead to increases in administrative costs and premiums for remaining members in the group insurance system, potentially leading to greater erosion of their retirement savings," its submission said.

The government has estimated there are about 9.5 million super accounts holding less than $6000 in Australia and its changes will save hundreds of millions in fees.

AIA Australia, an insurer, cited modelling from KPMG that found the government's reforms would lead to a 26 per cent jump in premiums.

However, Choice disputed some of the industry's claims, pointing out there are about 10 million unintended multiple accounts in the system, which are losing an estimated $2.6 billion in fees and insurance premiums every year. The government's plan should ensure some of these duplicate accounts are merged, or at least that they no longer pay as much in fees.

"The savings from closing these duplicates are likely to more than offset any potential premium increase," Choice said.

Clancy Yeates writes on business specialising in financial services. Clancy is based in our Sydney newsroom.

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