Retired financial adviser Jeff Hudson has amassed 14 kilograms of letters and documents in the nine years he has spent fighting industry fund REST Industry Super.
Garrath, like most other Australian super fund members, had been paying for life insurance through his super account.
When Hudson, a long-time family friend and a financial adviser of 43 years, took on the task of claiming on this insurance on behalf of Garrath’s parents, it sparked a nightmare dispute over the fine print in the REST insurance policy, provided by Hong Kong-based AIA Insurance.
Hudson’s is just one example of a super fund’s trustees and insurer playing hard-ball over a “hidden nasty” in a life insurance contract provided through superannuation. It is the sort of stand-off that has embroiled hundreds, if not thousands, of Australians each year.
The $92,000 claim was rejected by REST and AIA on the basis that Garrath’s account had fallen below $1200 and no contributions had been received for at least 62 days. This was despite him paying premiums and REST sending him statements until he died in November 2007, which stated he held insurance cover.
By law, millions of Australians are passively channelled into life insurance policies, paying $5.9 billion a year in premiums, which provide for income protection insurance and lump-sum payouts on death or total and permanent disability [TPD] – through “group” deals struck between insurers and super funds. They are structured on an “opt-out” basis, which means premiums are automatically deducted unless the member specifically opts out.
An investigation by Fairfax Media reveals that a slew of super fund trustees have recently been renegotiating life insurance contracts with insurers at a time when premiums are surging up to 200 per cent in some cases. Negotiations have become tense, forcing some super fund trustees to cop a massive hike or trade away some of their member’s rights.
It can also reveal potential conflicts of interests as super funds get rebates from life insurers if they keep a lid on claims. In 2014, for example, REST received a $20 million rebate from AIA, though it told Fairfax Media that it remitted $14.5 million back to AIA the following year (it said the rebates were returned to members through stable premiums or services).
QSuper, which manages $60 billion of retirement savings, took the radical step of establishing its own life insurance company for members after it couldn’t get a decent deal for members with an existing life insurance company.
But not all super funds are looking after their members.
The investigation suggests some, but not all, super fund trustees have given too much ground in these crucial negotiations, potentially rendering some policies junk insurance.
“I have big concerns that we have four or five million Australians with life insurance in their super and they don’t even know they have it.”
Senator John Williams
Lawyers warn that some clauses may be breaching the law.
These dud policies pose a problem for workers who might lose their ability to work in the future; threatening to erode this crucial financial safety net and worsen Australia’s chronic under-insurance problem.
This ticking bomb comes as the spotlight is already on the $44 billion life insurance sector following revelations that CBA’s CommInsure was denying some legitimate claims by using out-of-date medical definitions and claims managers were allegedly “leaning” on doctors to change their medical reports.
One financial adviser described the issue of TPD and income protection insurance in super as “one very smelly dung heap” and to handle with caution: “wear gloves, a face mask and carry a long-handled shovel”.
Federal Minister for financial services Kelly O’Dwyer told Fairfax Media she has concerns about the lack of transparency in the financial arrangements between trustees and insurance providers. “[This] raises questions about whether some of these arrangements are in the best interests of members and whether members are receiving appropriate cover,” she says.
Ms O’Dwyer says the government supports transparency in the financial system, “and especially in respect of the compulsory superannuation savings system”.
Her comments come on the back of a draft report released this week by the Productivity Commission into the competitiveness and efficiency of the superannuation system. The report says it will look at the role of life insurance in super funds and whether trustees are offering the most “appropriate” insurance for their members, and whether the costs of insurance are minimised for the type and level of cover provided.
Nationals senator John Williams, an influential critic of Australia’s financial services companies, says the life insurance industry needs cleaning up. He is appalled by the Donaldson case.
As he puts it, if someone’s home burns down and they have contents insurance, their claim doesn’t depend on how much money they have in their bank account. “It is disgusting stuff,” he says.
Williams, whose re-election to the upper house was this week confirmed, told Fairfax Media that he would relaunch the Senate inquiry into life insurance that was announced before the election – but would broaden it to look at life insurance deals in super and the role of trustees.
The Garrath Donaldson case has, in part, convinced him that the “opt-out” system of life insurance in super should be dumped in favour of an “opt in” system.
“I have big concerns that we have four or five million Australians with life insurance in their super and they don’t even know they have it,” Williams says.
“I think it should be an opt-in [situation], especially when, as I said, we’re seeing stories about insurers failing to pay claims.”
His comments will send a chill down the spine of those running Australia’s super funds and the insurance industry.