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Parliamentary Joint Committee on Corporations and Financial Services
18/08/2017
Life insurance industry

CHESTER, Ms Karen, Deputy Chair, Productivity Commission

CHAIR: Welcome. I remind committee members and witnesses that, while this is a public hearing, care should be taken to protect the privacy of individuals and arguments should be made without naming individuals. I invite you to make a short opening statement, and at the conclusion of your remarks I will invite members of the committee to put questions to you.

M s Chester : I'm conscious it's a Friday and I understand you have questions you'd like to put to me on our stage 1 study on how to assess the competitiveness and efficiency of the super system, so I am happy to go straight to questions.

Mr KEOGH: Simply, because I know you covered this in that report, how would you describe from the analysis you did the purpose of insurance within superannuation?

M s Chester : Our stage 1 study, as you will recall, came out of David Murray's review, the Financial System Inquiry. Mr Murray very kindly gave us a very considered three-stage review to undertake. Stage 1 was how you would actually go about assessing the competitiveness ss and efficiency of the super system. We completed that last year. Stage 2 was about alternative default arrangements for super, so not really getting into the area of insurance. And stage 3, which we've just started, on 1 July this year, is actually doing the review of the competitiveness and efficiency of the super system.

As part of our stage 1 study, we were looking at setting up an assessment framework to identify what you would want to see if the super system was competitive and efficient. So we established an assessment framework and we were very pleased to have the time to do that last year, because nobody, domestically or globally, has ever undertaken such a review. We established five system-level objectives; 22 assessment criteria supporting those objectives, so the questions to ask and answer; and then 79 unique indicators, so the evidence that we would gather to make that assessment, which we are about to do now.

With respect to insurance, we did establish one system-level objective—I think that might go some way to answering your question—and that was, for insurance, that the super system provides value-for-money insurance cover without unduly eroding member balances. That was the system-level objective that we established. Then we have two supporting assessment criteria for that and 17 indicators, which is the evidence that we're now looking to gather.

Mr KEOGH: What were the two assessment criteria?

M s Chester : The two assessment criteria are: do funds offer value-for-money insurance products to members and are the costs of insurance being minimised for the level and quality of cover?

Mr KEOGH: Both of those criteria seem pretty difficult to assess on a global basis. I would imagine that the answers to those questions differs almost by individual, let alone cohort?

M s Chester : We're assessing the overall system performance. But even in doing that, you do need to look through to what the member experience is, albeit not on an individual level. To give you some idea, it might be helpful if I run through some of the indicators—or, really, the evidence base—that enable us to ask and answer these questions so that it is more tangible for you. For example, do funds offer value-for-money insurance products to members? Are they providing them with appropriate insurance products that overall meet their needs? We ask things like: are there duplicate insurance policies? With what ease can members opt out of insurance, or amend cover or make claims? What is the number of members changing or opting out of default insurance cover? What is the fund's use of member information to inform product design and pricing? So we are getting granular, but we'll be getting the data and the evidence in such a way that will form a view across the system as a whole.

Mr KEOGH: In looking at those assessments—in making those assessments—and, in particular, with that idea of the potential to eat into superannuation savings themselves, in the work that you've done so far are you concerned about transparency in the process? Having insurance in superannuation, where superannuation is compulsory—at least for those who are wage earners—embeds, or sort of creates, a compulsory insurance regime. But it's a compulsory insurance regime which is somewhat hidden. It's not stated as a compulsory insurance regime, it's stated as a compulsory superannuation regime which happens to have insurance. Is there a transparency issue there from an economic sense—let alone from a consumer sense?

M s Chester : No. They're the sorts of issues we will get to. We are living in a world with super being mandated as compulsory, but insurance is a little different in that it's mandated for default products in two forms of insurance—life insurance being one, with an opt out. You can only opt out—

Mr KEOGH: Yes, so it might not actually be mandatory but it almost is, unless you are a more sophisticated investor.

M s Chester : And they're the sorts of issues we will be looking at. We are looking at doing a fund survey and a member survey to understand what the knowledge set of the members is. Do they understand that they actually have insurance as part of their default superannuation arrangements?

Mr KEOGH: So as you go on through this process will your assessment look at the two separately, as well as together? So, the benefit of an almost-compulsory insurance regime, as it exists now within superannuation, versus the concept of an almost-compulsory insurance regime?

M s Chester : It might be helpful to look at—

Mr KEOGH: There is one thing to look at: is this good value for money in terms of this being the cost of obtaining this insurance and the level of cover that people get? It may well be great value for money, but when you overlay it with, 'It's coming out of my retirement savings,' maybe that's not so great. But maybe there is another way of structuring that. I don't know.

M s Chester : You are correct in saying that we will be looking at it from the perspective of: is it appropriate for the member? Is it value for money? And is it unduly eroding the member's balances? I have to say, and we called it out in our stage 1 study, that it is actually quite difficult for the trustee of the superannuation fund to really manage what are, effectively, conflicting objectives to maximise superannuation balances for members and also at the same time take insurance products from those balances. It is quite difficult to know whether they are appropriate unless you have sufficient information on the member, like: are they married? Do they have dependents?' There are things like that.

Mr KEOGH: The concept of 'unduly' seems to be one that masks a whole range of assessments.

M s Chester : That's right. Our terms of reference are quite explicit with respect to what we're meant to be asking and answering around insurance—so, above and beyond the issue: if the super system was competitive and efficient, would they be delivering on that system-level objective that I articulated for you a little bit earlier? It might be helpful if I just run through exactly what the Treasurer has asked us to do, because I think it goes to some of the issues that you're raising. We're meant to consider the appropriateness of the insurance arrangements inside superannuation, including the impact of insurance premiums on retirement incomes of both default cover and individually underwritten cover funded inside of super; the extent to which current policy settings offset costs to government in the form of reduced social security payments; whether policy changes could improve default cover through superannuation so that default cover provides value for money, does not inappropriately erode the savings of members of all ages, and delivers consistent outcomes across the system; and whether policy changes are needed to ensure that insurance is not a barrier to account consolidation.

So our original system-level objective that we developed last year, and the assessment criteria and the indicators, would answer about two-thirds of what is in our terms of reference. Our terms of reference go a little bit further and will require us to do some modelling around how it might erode member balances and also to look at what could be, potentially, the impact on social security payments from the current insurance arrangements within superannuation.

Mr KEOGH: Okay. Thank you.

Ms BUTLER: This may be a silly question, but why are they focused on the costs of insurance being minimised for the level and quality of cover? Is that because of the work that APRA has been doing that indicates that there's been a decline in profitability of group insurance offered through superannuation funds in recent years?

M s Chester : Sorry, I missed the first part.

Ms BUTLER: I'm trying to understand the second of your standalone criteria: are the costs of insurance being minimised for the level and quality of cover? Is that about looking at the fact that profitability has been declining in relation to the provision of insurance? Are you looking at it from a perspective of whether superannuation beneficiaries are being ripped off by inflated costs of superannuation? What is the underpinning reason for that?

M s Chester : What we are doing with that assessment criterion is saying: assuming assessment criterion No. 1 is met—that is, you've got appropriate policies in place for your members—are they then getting good value for money in a cost sense? Some of the things we will be looking at there are insurance premiums inside super compared to outside super for like policies. Are they getting value for money? Are they getting the benefits of the pooling that's provided through the membership of the super funds?

Senator WILLIAMS: Can I butt in there, Teri, please?

Ms BUTLER: Yes.

M s Chester : Insurance—

Senator WILLIAMS: Could I just stop you there, please, Ms Chester.

M s Chester : Sure.

Senator WILLIAMS: So you will be comparing the value of your group insurance for someone who might say: 'Here's my policy and group insurance. I'll opt out of that and I'll go and get retail insurance from a financial adviser. Which is the best insurance, the best value, the best suit?' Is that what you're doing?

M s Chester : That's one of the areas that we'll be looking at.

Senator WILLIAMS: Very good.

Mrs Chester : In terms of—

Senator WILLIAMS: Sorry, Teri.

Ms BUTLER: No, no.

M s Chester : other purported benefits of effectively grouping life insurance through superannuation as a vehicle, providing value for money in a cost sense to the members—once we've answered, 'Have they got the right policies in place?' They're things like insurance premiums paid by members as a percentage of the superannuation guarantee; contribution fees and premiums; differences from outsourcing insurance services; related versus unrelated parties; and whether trailing adviser commissions are still embedded in choice products and insurance. We are looking at unbundling all of those sorts of issues as well, to the extent that we can, given some of the wonderful data issues we are facing.

Ms BUTLER: How did you come to land on those two as the two key standalone criteria, because there's a broader question, isn't there? The report talks about different aspects of efficiency, at page 6: operational efficiency, allocative efficiency and dynamic efficiency. Obviously, there is a lot more to those things than just making sure that superannuation based insurance is being offered on a value-for-money basis to the individual consumer. There is also the public interest in ensuring that people have adequate levels of insurance, and then there are a range of other considerations we might have in terms of the purpose of superannuation broadly. How did you decide to land on those two standalone criteria? This may be in the report, and I may have missed it, sorry.

M s Chester : No, no. It's a good question, Ms Butler. Effectively, what we are trying to do is a report card on the performance of the super system. The super system—and insurance within the super system—is a function of government policy. It wouldn't be in the way, shape or form it is today except for the regulations that are in place that reflect that policy. So when we are assessing the performance of the system, we can't really hold the industry responsible for the policy settings. To some extent they are working within those as a given. When we developed the framework, we were very mindful to make sure we weren't holding the industry to account for a policy setting, and that is what was really the constraining factor for us coming up with the assessment criteria. Indeed, in insurance it's probably even more constrained and a little trickier for trustee board members because it is purely a function of the regulatory requirements, how they have evolved over time and what is required of trustees. So we are not getting into the bigger policy issues that I think you're raising in doing a report card on the industry about whether there are problems of underinsurance and whether this is the best policy way of dealing with it. That is outside the scope of our review.

Ms BUTLER: Are there any previous Productivity Commission reports looking at the question of whether there is underinsurance? Has that been looked at in previous reports of which you are aware?

M s Chester : On my tour of duty, for the last four years, the only time we looked at issues around underinsurance was when we touched on it when we did natural disaster funding arrangements. I was one of the commissioners on that one.

Ms BUTLER: Other than that, nothing around these questions of life insurance, income protection and those sort of issues?

M s Chester : Not that I can recall.

Ms BUTLER: This might be oversimplifying things, but do you think the Productivity Commission might actually come to the view that insurance should or should not be part of superannuation? Do you think you will get to that sort of existential question of whether insurance should be included as part of people's superannuation, whether in default or otherwise?

M s Chester : The terms of reference that we have been given are really asking the question: insurance within super is a given, but is it working best from the perspective of members and, if not, what policy changes might make it better? That being said, it's never has been remiss of the commission to raise policy issues in the course of terms of reference, which could then result in further work or inquiry being done.

Ms BUTLER: I think you probably have already answered this, but to put it another way, you don't have a view there is underinsurance because you don't have any empirical basis to think that? You don't consider the terms of reference to extend to the question of whether income protection or life insurance within superannuation can assist in ameliorating underinsurance problems, so you don't intend to consider those questions at all? Is that right?

M s Chester : At this point in time—we've only just started with the terms of reference in the last few weeks—I am very much guided by appropriateness of the insurance arrangements inside of superannuation.

Ms BUTLER: SMSFs are not part of the review—is that right?

M s Chester : They are part of our review.

Ms BUTLER: They are? Are they going to be considered for value for money, the first of the two criteria?

M s Chester : SMSF doesn't really figure that much with respect to insurance because the biggest issue around insurance is where there are multiple accounts and where you have default.

Ms BUTLER: If you have got an SMSF, presumably you have no other superannuation.

M s Chester : You might still choose, and indeed some do, to get the benefits of pooling. Indeed, we have heard incidences of folk having an SMSF but still wanting an Australian super account because they might get a better deal on insurance than they would as an individual going to the retail market. For an SMSF they are electing to do it on the basis of their own informed choice.

Ms BUTLER: Is it common for SMSFs to buy insurance for the beneficiaries?

M s Chester : Through the SMSF vehicle?

Ms BUTLER: Yes.

M s Chester : I don't think I know the answer to that question.

Ms BUTLER: I don't know that I've ever heard of—not that I necessarily would have—an SMSF investing in insurance for the beneficiaries of that SMSF. I thought there might be some sense of whether that is even something that would be on their radar.

M s Chester : Again, we might answer this in part with some of the comparators we do between the value for money that members are getting through superannuation versus those who aren't purchasing life insurance through superannuation. SMSF would form a view—these are people who are thinking about their own financial arrangements and who are perhaps more informed on these matters—that, 'Hey, if I buy it through a superannuation fund, I'm getting grouping arrangements that wouldn't otherwise be available to get.'

Ms BUTLER: Box 4.3 of the report, 'Selected comments on the Commission’s proposed system-level objectives', had inside it a statement that the Productivity Commission received suggestions that the broader social and economic benefits of insurance should be included within the objective of insurance in superannuation. Have you formed a view about that question, about whether or not the benefits of insurance per se should be included within the objective of insurance within superannuation?

M s Chester : I don't have the full context of what we said in box 4.3, and it is a while ago that I was—

Ms BUTLER: Has anybody got a copy of that?

Senator O'NEILL: I've got that box open. In box 4.3, under 4.4 'System-level objectives', there are a number of statements there from AMP, AustralianSuper and QSuper. The final statement is from the Association of Superannuation Funds of Australia. It reads as follows:

The Commission’s proposed objectives are subsidiary objectives that relate to, and would support [an overarching objective on retirement income adequacy].

The second and final sentence is:

The proposed subsidiary objectives require refinement—in particular the insurance objective should incorporate the broader social and economic benefits of insurance.

That was from ASFA in their submission to you, and I guess that's what the question relates to.

Ms BUTLER: Yes.

M s Chester : That was clearly the view of ASFA and obviously one that we chose not to incorporate in finalising our framework, thus you can assume that we didn't—sorry, I should have brought a copy with me.

Senator O'NEILL: Given the level of underinsurance that's generally reported—although I was listening when you gave your evidence to Ms Butler—why did the Productivity Commission take the view that the social and economic benefits of insurance should not be part of the assessment framework?

M s Chester : I think it comes back to the point I was touching on before. If there are social and economic benefits of arranging for insurance to be part of the superannuation system—I can only presume that that was part of the genesis of requiring it to be part of the default arrangements—that's a policy objective of the government. At the end of the day, a superannuation trustee board is really meant to be doing what's in the best interest of its members within the confines and constraints of policy and regulations. That's its overriding objective, not to implement government policy itself, if that makes sense.

Senator O'NEILL: I understand what you're saying, but it kind of puts the members as if they sit outside the broader context of the social and economic benefits in which they participate as well. It puts them at odds as competing interests rather than complementary ones.

M s Chester : It's interesting when you go back and look at the history and the genesis of how insurance has been brought into the superannuation system. It was kind of like the organic beginning, and then there were changes in 2005 with choice of funds, which is the first time opt-out for life was mandated for. In 2013, we had the Stronger Super changes to opt out for life and TPD. It was then that there was a requirement for the superannuation trustee board to have an insurance covenant in their insurance strategy, which is about as close as you can get to what you'd expect a superannuation fund trustee to be able to deliver. That is that the insurance strategy needs to ensure that, among other things, appropriate levels of insurance are provided with respect to membership demographics and that the cost of insurance does not unduly erode member balances. That is, in a practical sense, what government was requiring them to deliver, by making sure that insurance was part of default super on an opt-out basis. The genesis that's intimated, though, is that the government of the day did make a call that it made sense to leave insurance bundled with default on an opt-out basis for the very reasons that you're talking about. But, again, that's government policy. It is also interesting when you're looking at the history of it that nowhere in that history has there been an assessment in a cost and benefit sense of putting insurance into default super.

Senator O'NEILL: Effectively, it's delivered cover for, what, about 93 per cent of Australians who are working and have a superannuation account?

M s Chester : The metrics are 70 per cent of life insurance policies, 90 per cent of TPD and about half of income protection are provided through the super system today. They are the latest metrics, as we understand them.

Senator O'NEILL: That is a very significant change in insurance behaviour in Australia in a very short period of time—isn't it?

M s Chester : I don't know what the data was previously, senator. I was just quoting what I understand the latest metrics to be. Those are the sorts of things we will be looking at as we talk about the evolved history of insurance's role and place within the super system.

Senator WILLIAMS: I'm going to ask the Productivity Commission to pay particular attention when you do this inquiry and the recommendations to look at people with group insurance who may change their employment, then change their super fund and then have a second lot of insurance. For example, a young girl or a young bloke working for some employer for three years goes to the next employer who says, 'Here, sign the form here. This is our super fund'. All of a sudden, they have one frozen and then the insurance premiums will eat it away, and that super will end up with nothing unless they do something. Education is needed that says, 'Stick to the one fund. Have the one policy.' I know of people with three different super funds and three life policies, and they weren't aware of them, didn't pay enough attention and were ignorant about them, and those insurance premiums were eating away at their super. Could you pay particular attention to that and how we can fix that?

M s Chester : I assure you that we will and we touched on it in the second-stage study with the default arrangements, where we recommended as part of a draft recommendation—and we will finalise our views on that as part of this stage 3 inquiry—that members should only ever default once. That fund's default product, assuming it's a strong-performing fund, should then stay with them through the rest of the jobs they may have.

Senator WILLIAMS: Stick to the one fund.

M s Chester : Stick with the one fund but make sure we have arrangements in place across the funds that we are defaulting members into that are performing well. We don't have that risk mitigated with the current default arrangements.

Senator WILLIAMS: If it's not a fund that is performing well, take it out and put it into a better fund, but only have the one fund.

M s Chester : Senator, we're very mindful of that and called that out earlier this year as one of the most egregious, systemic failures of the system today—that is, we still have unintended, multiple accounts. Particularly for young folk and low-income workers, that is unduly eroding their member balances. For some of the policies, having multiple policies is an oxymoron. For example, you can only claim TPD once. For life insurance, multiple policies for a 20-year-old who doesn't have a mortgage or children is quite perverse.

Senator WILLIAMS: It's madness. The point, too, is if you have multiple policies and you have a claim of TPD or income replacement, only one will pay it, not the three or four policies you have. You won't get four times the money, but you'll be paying four times the premium if you don't watch this as you go along. I think it is a huge failure in our education system. I discussed it with the education minister last week. Education should be about preparing people to face the big world of life when they leave school. I think we need to educate them more about financial literacy, financial management, superannuation and life insurance—all these things they will face. If they understand it better, know it better and follow it better, they will have a much bigger superannuation fund when they go to retire.

M s Chester : The other thing, though, that we're grappling with in with the super system is we're living in a world of compulsion. When you have young members who may be disengaged, as you have suggested that some of them are not informed around financial literacy matters, the onus is on the government to make sure they are protected from some of the egregious failures like multiple accounts. Multiple accounts for super in and of itself is an egregious failure because they're paying multiple fees on a smaller base of money. Exacerbating that is where you've got default bundled with insurance. We need to understand the knowledge set of those default members: do they even know that they've got insurance policies; do they know that they've got multiple insurance policies?

ACTING CHAIR ( Mr Van Manen ): With the multiple accounts—and, back in my life prior to this place, the best I had was eight from a client—part of the problem is their workplace agreements stipulating that only one fund is available and, if they've got a fund with somebody else or they've got their own self-managed super fund, for whatever reason, if they go and work with a particular employer under a particular workplace agreement, they can't have contributions paid into their own fund; it's got to go into whatever the fund is that's nominated.

Mr KEOGH: That's not the law anymore. You have to be given choice at the time of signing on. There is a requirement.

ACTING CHAIR: There's two or three—

Mr KEOGH: There's a default. The agreement might specify a default, but you are open to do whatever you want.

ACTING CHAIR: Oh—

Mr KEOGH: No. It's against the law now. That law changed.

M s Chester : There were some improvements made under the choice regime, but you're correct that there still are some EBAs that do not allow for choice. Indeed, in our draft default superannuation report of earlier this year, one of our draft recommendations was to get rid of the last loophole, to hoover up those. We got some very telling submissions from members who were very frustrated about not being able to do account consolidation because of some of the EBAs that they're covered with under the award system.

ACTING CHAIR: Once those EBAs expire, they will have to comply with the new laws that Mr Keogh has outlined.

M s Chester : But there's still a legacy issue.

Senator WILLIAMS: One of those old perks from your mob, was it, Matt? 'We have to look after the union.'

Mr KEOGH: The point is it unrolls over time.

ACTING CHAIR: One of the things that you point out in the report is that there's been a significant increase in insurance premiums, basically across the default insurance sector. Have you been able to identify what the cause of those premium increases is? I'm aware they've been quite significant in some funds. What is the reason for that, or what is the justification from the insurance companies for that?

M s Chester : At this point in time we don't have a firm evidence base around that. In the course of doing our stage 1 study, though, and, as part of the consultation that we did, we kind of heard a story from the industry about the pendulum swing: when insurance being bundled with default super began to accelerate, the insurers—

Mr VAN MANEN: There was an arms race to get business?

Mrs Chester : It is interesting. There are actually some very strong parallels between the stories that we heard there and the evidence base that we gathered for natural disaster funding arrangements in terms of the pendulum swing of pricing. I think what's compounded the problem in the super system is that large group arrangements were entered into and there was a suggestion that they were materially underpriced to begin with, for insurance companies to get the deals with the super funds. All of a sudden, people start claiming. The insurers didn't really know the underlying risk for the group because they didn't have the basic demographic data, because the super funds didn't have the basic demographic data. You didn't know who was a smoker and who was not, or what industry they worked in. These are all the sorts of things that are important to us as we go into stage 3. There is basic information you need to know about your membership to ensure it's appropriate policy, but equally there's some basic information that the insurers need to know about that membership, to get the pricing right for the group. You get some benefits from the group in terms of spreading the risk pool but you still need to look through that membership cohort and understand what is the underlying risk that the insurer is underwriting. We have seen a pendulum swing—you're quite right—in the pricing of the premiums, and that's brought a lot of attention to this important policy issue, but one of the questions we need to ask and answer now is: are they now overpricing because you still don't have the right demographic and individual information on the individuals?

We've heard stories about people having their life insurance policy on the assumption that they're a smoker because that's how it was priced for the group, because the super fund doesn't have information on who are smokers and non-smokers. They're the sorts of issues that we'll be getting into.

Mr VAN MANEN: There's not the capacity, is there, for individual members to actually tailor their policy and consequently reduce their premium costs, unless they seek to get additional cover? It's just on the standard cover, isn't it?

M s Chester : That's right. Unless you want to go in and amend your default cover—and we will get some evidence and data around this. We're hoping to get it from the super funds as to what incidence there is of that. But, remember, we are talking largely about the default members here. These are people who haven't exercised choice with where their superannuation should be going, so it's highly unlikely that they're exercising choice around their insurance arrangements unless they're taking out a mortgage, they've got a family, they're starting to think about these things, and then, all of a sudden, they start to look at what's available in a super policy. So you're right: there's no individual assessment of the risk, and not the sort of information you and I would give to get tailored insurance for ours through our superannuation.

Mr VAN MANEN: Thank you.

Mr KEOGH: You outlined your concern about insurers basically under-tendering for that group work. There are a whole heap of smokers and we know the proportion of the population who smoke and the greater statistics on that, and if they fit in particular industry types. That's basic demography that you've outlined, which you would think a good insurer would get themselves across.

M s Chester : The case that I cited was an individual case that was brought to our attention as part of our earlier work, and it is probably an extreme case. You're right: if you do not have information on the individual membership, there are some assumptions that are being made by trustee boards on behalf of their member cohort when they're tendering for insurance policies for their membership. There are ways of coming up with some informed demographic averages that would mean you get closer to an appropriate insurance policy for the membership as a group. But, as we called out in the stage 1 study, you can't really expect a superannuation fund trustee to be able to deliver a policy that's tailored for an individual if it's done on a default basis—

Mr KEOGH: No, of course not.

M s Chester : because you don't have the information that's required for the 10 pages of an underwriting decision.

Mr KEOGH: No, I accept that. That's the point of group insurance. But it's the insurer's job to be able to price for that. Is that not their job, to be able to price for that? Am I expecting too much from insurers?

M s Chester : No. The perspective and the lens that we're looking at it through is: what should we expect of the superannuation funds in delivering on their obligations to the members, given the regulatory arrangements that they work within, about providing appropriate insurance cover for value for money.

Mr KEOGH: The point you're making is that the information the superannuation fund trustee gathers in taking on a new member is so low that it doesn't really assist it in providing useful information to a potential group insurer for them to be able to adequately price insurance to that cohort.

M s Chester : That's right. As part of doing the fund surveys, we're going to try to get a better handle over what information the funds currently have on their membership to inform those group decisions—again, for default members, where we're doing grouping on a not-fully-looked-through basis of the underlying risk of the individual. We all get the benefit of the grouping when we have our insurance through superannuation. But the default member, with as little information as the superannuation fund may have on them, is kind of in a different part of the bucket. I won't get into too much detail here because it's too early in our stage 3 inquiry, and I need to have a—

Mr KEOGH: What do you mean by 'they're in a different part of the bucket'?

M s Chester : Say if I had, on my own choice, superannuation with a fund and I wanted to take out an insurance policy through my superannuation. I then go through the full process of filling out the form and saying: 'I'm not a smoker, so that helps out. I run three times a week, so that helps out.' I get the benefit of that in terms of how it's priced. The default member doesn't get the benefit of that.

Mr KEOGH: No, they don't get the benefit of a reduced premium or how that's priced, and at the same time they're not being pinged—the smoker's not pinged for an increase to premium because they're at a higher risk. That's what group insurance is.

M s Chester : No, the group in the default bucket are all getting pinged for an assumption that there have to be some smokers in there.

Mr KEOGH: I appreciate that. That's what I'm saying: they're not getting the benefit of not being a smoker, and the smoker's not getting a loading for being a smoker. That's what group insurance is. But the point that you were making before was that the insurers perceived there to be this uptick in claims, and they had to reprice their policies because they hadn't worked out that X per cent of Australians smoke. I know that is an outlier example, possibly, but it goes back to my previous point or question. Are you saying the amount of information that's provided on a default basis to a superannuation trustee is not sufficient for a group insurer to appropriately price or have confidence in the way that they price the default group insurance, or are you saying that it just leads to them charging a much higher premium than they might otherwise be able to get away with if they had all the information?

M s Chester : That's the evidence base and the analysis we'll be doing as part of stage 3. All I was intimating was that, as part of stage 1 and 2, we'd heard some examples from people like ASFA and others, and the insurers themselves, of the pendulum swing having occurred and some inappropriate policies being in place because of that.

Mr KEOGH: Yes, so it's just that insurers didn't do a very good job.

Mr VAN MANEN: Well, I would take it a step further. The employers are not providing sufficient detail, obviously, in the membership application form to the insurance company to ensure that there's sufficiency of detail in the data that the insurance company has for the insurance company to adequately price the pool. I have seen in the past that basically the employer fills out a schedule of employees. It's a single line: it's the employee's name and date of birth and maybe one or two other details—address and bits and pieces, and that's about it. I would assume in this day and age that the level of a detail that an employer now has to provide a fund, even in a group basis, would be significantly more than it was 10 years ago, and that should improve the quality of the data that the super fund has to then ensure that the insurance company is provided with the data necessary to price the product appropriately. Is that part of the work? Are you going to be asking for copies of those application forms to see what data is actually being provided by employers to the super fund?

M s Chester : One of the areas of our proposed fund survey will be what information, across the areas that you would normally expect to see, the super funds have on their membership base and what percentage of their members they have that information for. One of the advantages that we have with our inquiry work is that we're going to be gathering evidence that hasn't been gathered before. Indeed, that's one of the challenges that we have. There's a lot of data that the regulators collect and some information that the funds collect. The data that the regulators collect is very largely through the lens of the fund, not through the lens of the member, so there's not as much granularity as we would normally like in order to understand and answer our questions, like: is it appropriate insurance policy and is it value for money for the membership? As part of the fund survey, you need to understand what is the input into those policies is and how they're being priced. So we will, for the first time, know across the system how the super funds are going at collecting that information.

Mr VAN MANEN: Will part of your work be looking at the systems of the super funds to ensure they have the capacity to collect this data?

M s Chester : There is opportunity for the super funds to tell us if there are any impediments to them being able to meet their obligations, this being one of them.

Mr VAN MANEN: I just find it very strange, when you have a look at a choice of fund nomination form and the amount of detail that now goes on there, that the super funds don't have the level of detail we're discussing. Or are some of these issues we're seeing not so much reflective of current practices but a consequence of legacy practices for which the price is now being paid?

M s Chester : Hopefully we'll have the answer to that by 30 June next year.

Senator O'NEILL: I have quite a few questions, and some of them might overlap in some way with some of the commentary we've already had, but I want to plough through a few to get as much evidence on the record as possible. What data was used to indicate to the Productivity Commission that many people have the same type of insurance cover across those multiple superannuation accounts?

M s Chester : We don't have any data or evidence on that at this stage. A lot of the information that was quoted in our stage 1 study, which was really to develop the framework to assess the competitiveness efficiency of the super system as part of that insurance, was cited from some of the evidence that was provided to us in submissions, albeit, it's evidence that we now need to broadly collect and assess.

Senator O'NEILL: So an evidence-quality issue is at the heart of a lot of speculation in this area, is that fair?

M s Chester : Again, this is the great advantage of having been able to do the stage 1 study: to be able to really set up the architecture of how to do this assessment, but then look towards what evidence base and what data we need to collect and gather to be able to ask and answer those questions. In the course of doing that, and, indeed, since the study, we've been able to go and kick the tyres on that data and that evidence to try to work out where some of the gaps are.

In our stage 1 study there is a beautiful table at the end of chapter 7 which sets out, over about 13 pages, the assessment framework. One of the columns in that tells you where we think we're going to be sourcing the data for the evidence. We had a bit of an idea of where there were some gaps and where there might be some problems. The team has done a lot more work around that since we completed the stage 1 study, so we've been able to refine where we'll be harvesting the information. Where we found that there were some problems and gaps was in areas where we thought we would be able to do some trend analysis or time-series analysis. The regulator has only collected things for two or three years, not five or six years. We worked out ways to try to get around some of those data- and evidence-gap problems, and, to some extent, we've had to expand what we're going to require from our fund and member surveys to try to fill those gaps. On the whole, we're comfortable that we'll be able to make the assessment that we've been asked to do by government, but it's telling evidence in and of itself that some of these data gaps do exist.

Senator O'NEILL: Yes, I was a little surprised when you were able to quote the figures of the 70, 90 and 50 per cent, in terms of the group insurance held within, but you had no capacity to say, 'Before, those people had basically only two per cent, instead of 90 per cent of Australians,' or '10 per cent of Australians versus 93 per cent of Australians had insurance of this kind.'

M s Chester : We're working with not only research firms to pull together the historical story but also insurers, themselves. It's a situation where we learned in stage 1 that the dots aren't connected. The insurers couldn't tell us where there could be unintended, multiple insurance accounts.

Senator O'NEILL: Of the survey that was used—which you refer to on page 203—to determined how many people didn't intend to hold duplicate accounts, why did a quarter of the respondents in that account say they couldn't be bothered? Have you got any idea about why? Do you have any qualitative analysis of why people supposedly couldn't be bothered to merge their accounts? Was it too difficult? Was it a concept they didn't understand? What is going on in that space?

M s Chester : There are kind of two issues going on in that space. The first is what I call the three C's of superannuation. You're dealing with the world of compulsion, complexity and cognitive biases. When you mix that with young people, the 'don't bother' element might be, 'I'm 20; I don't even know if I've got super and I don't know if I've got insurance with my super and I don't really care.' That's a function of compulsion and the other two C's, and that's a challenge that superannuation funds do face. Indeed, it is an obligation of government to make sure the policy settings are such that their interests are protected when they are that disengaged and unsurprisingly so.

Senator O'NEILL: Do you think that because there's been a cover provided to people who previously had no cover, regardless of the fine-tuning we are talking about to improve it, there is an essential good that already exists within the system that must be protected, that people now have insurance who formerly never had any?

M s Chester : To the extent that there was underinsurance for poor financial literacy reasons, that would be a benefit of insurance being provided through superannuation. That goes to the heart of the question: are the policies appropriate for the members? Does it look right that a whole bunch of 20-year-olds have life insurance? Intuitively you would think not. So we will get to those sorts of issues as part of stage 3, in terms of what we can expect of the fund trustee if they are being competitive and efficient.

Where they are aligned here, in terms of appropriate policies, for a 20-year-old to have life membership that is eroding their member balance, is that where the interests of the member should be aligned with the interests of the fund trustee? At the end of the day, the fund trustee doesn't want to erode member balances. That's their fund's undermanagement. What's king for a fund trustee board is to have a great fund, scale and efficiencies and to do the best thing by their members.

Senator O'NEILL: But is it part of having the whole structure in place to create a pooling effect so that there is an offset for other participants in the scheme? It might not be a perfect thing for you at age 20, and things can be adapted in small ways, but, at the other end, we have people who have never had insurance. We are talking about millions of Australians who now have insurance and never had it. Do you have any detailed research around the cultural and linguistically diverse community, and the change in the insurance they now have in place, and the Indigenous communities?

M s Chester : Sorry, I didn't catch the question.

Senator O'NEILL: Do you have any evidence about the change in the scale of insurance now held by people of cultural and linguistic diversity? The same question applies for Indigenous Australians. How many more millions of them have insurance, in those categories, than previously was the case?

M s Chester : That is not evidence that we have looked at to date. I think we are going to struggle with looking at it via the cohorts that you've suggested—for example, Indigenous—given the data availability issues that we have.

Senator O'NEILL: It is concerning to me, frankly, that it's not something you're looking at.

M s Chester : No, we are looking at the incidence of insurance being taken out through superannuation. I am not sure how far we can do the trend analysis that you are talking about, because of information and data and evidence problems that I flagged.

Senator O'NEILL: I want to go to the opt-out and the ease with which members can amend their cover or choose to opt-out in relation to default insurance. You make some comments in your report, on page 151, about that. What were the study participants asked regarding opting out or changing their policies? And what was the size of the study?

M s Chester : Just to remind you, stage 1 was setting up the framework. We are now going out and collecting the information and evidence. We are going to look at asking and answering the issue: how easily do the funds think it is for their members to opt out of insurance or to amend their insurance policies? Then we are going to ask the members, through a very broad survey, what their experience has been. To some extent, we can measure the expectations gap. Funds may think it might be easy for members to opt-out or amend their insurance policies, and it would be interesting to see what the member experience is there.

Senator O'NEILL: Didn't you refer to a previous study to inform your decision to undertake these questions?

M s Chester : We did rely on earlier research work that had been done by academics and by some research firms in the area largely to identify what we are able to ask and answer and then where we can find the evidence that, intuitively, you would want to know when you are assessing the performance of the superannuation system. One key indicator of a market functioning well is that people can switch at low cost; people can make decisions to amend their policies, change their super options or opt out of insurance. Identifying those transaction costs and how easy it is for members to be able do that is something we are looking at asking and answering. It is intuitive to want to do so in an overall report card on the super system, because it gives us an incredible insight into the competitive dynamic and the performance of the super funds.

Senator O'NEILL: Could I go to the statement. As I read it, there is a need to improve the information in insurance policies and product disclosure. We have discussed this a number of times in this committee. Have you formed a view at all about what such an improvement might look like and how it would play a role in the assessment of value for money?

M s Chester : I think I can be more helpful in answering that question in about six or seven months' time.

CHAIR: They are right at the early stages.

Senator O'NEILL: You actually said there is little evidence to say how well people understand. Are you undertaking research in that specific area right now?

M s Chester : We are indeed, partly through the member survey, looking at what other research firms and academics have done in the area and asking funds themselves.

Senator O'NEILL: If I can go to figure 2.4 in the report.

M s Chester : I will get that in front of me. Where would you like me to look in the report?

Senator O'NEILL: Look at figure 2.4, which is fees. You spoke a little bit about this earlier, I think, with Senator Williams and you said there has been a significant and varied increase in insurance premiums across the different funds. Why has there been a significant increase in insurance premiums in your view? What are the reasons for the variations across the different types of funds and how does that impact different age groups at this point in time?

M s Chester : I think the first thing to point out is figure 2.4 is about fees. Insurance premiums are not a fee. They are a payment for a service that is provided so you won't find insurance premiums in here. There is a problem with this figure in the way the data is collected. The figure there is overstated. That figure should only be showing what is the cost for the super fund in providing the insurance, not the premiums that are passed through from the insurer through to the member. But a lot of super funds have misunderstood what APRA was asking them for there and have included premiums. We are comparing apples and zebras unfortunately.

Senator O'NEILL: So it is not something we can read carefully?

M s Chester : No. The little footnote (b) is a very telling footnote.

Senator O'NEILL: How are you going to overcome this sort of challenge to get like-for-like comparison?

M s Chester : This is where we will be relying not only on the information and evidence that we will be gathering from the funds surveyed but also on what we have asked funds to come back to us with in submissions to our inquiry.

Senator O'NEILL: If I can go back to my demographic plea for culturally linguistic, diverse, Indigenous and often low SES participants who are quite new to having insurance, what research are you going to do around that?

How are you going the get the data regarding members who are unaware about what they've got?

M s Chester : I think that we should be able to get a sense by age cohort, so that will address your younger members. Hopefully we can impute something by member balances, which might give you a sense of income. For the rest, the data with the regulators and the information that we're aware of is collected from the lens of the fund and not the lens of the member, so we're not going to have the level of granularity that you would like in terms of being able to go into that level of detail with the cohorts. Indeed, if we rewind the clock to some self-initiated work that we did at the commission around the postretirement super policy of 2½ years ago where we actually did want to try and look at how postretirement super was dealing with Indigenous Australians, particularly in remote and very remote areas, we really struggled to find anybody who had done any work in the area or anyone we could really talk to. So I'm sorry to—

Senator O'NEILL: So, within the people who have the data, are you confident that there are no fields that identify people as Aboriginal and Torres Strait Islander, no fields that identify people by age and no fields that identify people in terms of income? Or is that data that's just sitting there but, as yet, has not been used in terms of value or identified and interrogated in terms of the value it holds?

M s Chester : We're harvesting that data now, so it would be premature for me to give you anything definitive. Where we're hopeful is around age, and that's probably about it.

Senator O'NEILL: Can you take on board the concern that might be in the community? Certainly I want to put on the record the concern about Aboriginal and Torres Strait Islanders before compulsory superannuation, the different situation that exists now and the impact of the threat to remove that compulsory insurance within super to those particular communities. Can that be part of your thinking going forward? Can you add that to the research burden that you're undertaking to make sure that there's an interrogation of that?

CHAIR: I think that that would come from the Treasurer, who's instigated the inquiry or the report.

Senator O'NEILL: I just wonder if there is sufficient breadth in the terms of reference for that to be given consideration.

CHAIR: I don't know if Mrs Chester can make that decision.

Senator O'NEILL: That's assuming that it's impossible for her to do it within the terms of reference. Mrs Chester, is it possible for you to give that level of consideration to Aboriginal and Torres Strait Islanders and culturally and linguistically diverse groups within the terms of references as they stand?

M s Chester : Maybe the best way to answer your question would be to say: where we think there are perverse gaps in the information that super funds have in order to make sure that appropriate insurance policies are in place, we will call out what we think those gaps are. I think you're getting into broader policy issues around the appropriateness of insurance and superannuation for particular disadvantaged groups in Australia that go well above and beyond the terms of reference that we have been given by the government. But, to the extent that we can call it out in terms of where we think there's inappropriate information informing the appropriateness of insurance and superannuation for members, we will be mindful of your concerns.

Senator O'NEILL: Okay. If I can, I have three quick questions about—

CHAIR: We're nearly out of time because we did start early.

Senator O'NEILL: I've got three short ones. With regard to market concentration, outsourcing and self-insurance of life insurance providers and administrators, how many super funds set up associated insurance companies to provide services and how many are outsourced to an external provider?

M s Chester : I'll have the answer to that question for you in about six or seven months.

Senator O'NEILL: The data is there but just hasn't been gathered yet—is that correct?

M s Chester : If all the funds respond to our survey request, we'll have that information for you. I'm assuming that they all will.

Senator O'NEILL: And can you explain the issues that you face in calculating market share of superannuation providers?

M s Chester : Sorry, Senator, I missed the question.

Senator O'NEILL: Have you undertaken any calculations of market share of superannuation providers yet?

M s Chester : Providers in terms of funds or in terms of—we'll be doing that as part of this analysis as well. We'll have a whole chapter around the market structures, which will go to issues like concentration. I guess, at the end of the day, though, we're looking through to the other issues that matter. So, does scale really matter, because that sort of suggests a high level of concentration of funds? There are other questions we want to ask and answer there. So, if scale is important, are economies of scale being realised; and are they being passed through to members? That's what really matters with scale. If you're small, subscale and that's then disadvantaging members, we'd be looking at issues like: are funds merging and consolidating, because that's in the best interests of members? I confess: I'm now probably straying into the world of superannuation and not insurance, and I'm conscious that I've got the chair looking at me and it's Friday afternoon.

Senator O'NEILL: My last one is: how will the Herfindahl-Hirschman Index play into the Productivity Commission's calculation of market share providers?

M s Chester : HHI will, Senator. It is near and dear to the ACCC's heart but, as I said, you can't really make an informed interpretation of a market dynamic and whether that competition is good or bad through one single metric, being the HHI index around concentration. We spent quite a bit of time unbundling that in our stage 1 report and identified all of the other things—the behaviours and other conduct—we will be looking at to get a true sense of how competitive the super system is, and we had some terrific feedback from the ACCC on the framework we had there.

Senator O'NEILL: I might have more questions on notice for you, but thank you very much.

CHAIR: Answers to questions taken on notice should be provided by 1 September, 2017 and I thank you, Ms Chester, for attending the hearing today and your evidence given to the committee. We appreciate that.