Update on restrictive definitions in default TPD insurance policies
Summary of content
- In July 2020, we released a report analysing the prevalence of restrictive definitions of Total and Permanent Disability (TPD) in large super fund’s default superannuation products.
- In this post we compare the prevalence of these definitions and their impact on different groups of people for a largely unchanged sample of large super fund default products between July 2020 and October 2021.
- We wrote to the 20 super funds we determined had the most restrictive policies in 2020 requesting the removal of their ADL type definitions.
- Since our campaign the number of policies that apply restrictive ‘Activities of Daily Living’ (ADL) type definitions of TPD to claimants has declined from 97% to 80%, with another 13% pledging to remove the definition from their policies in the near future.
- The percentage of policies that apply ADL type definitions to people working limited hours per week and those in certain ‘special risk’ occupations has substantially fallen since our intervention in 2020 to October 2021 (from 47% to 27% and 16% to 7% respectively).
- As of October 2021, the majority (57%) of policies in our sample have either removed ADL type definitions, are removing them or only apply ADL type definitions in a minimally restrictive way (e.g. only prohibiting the claimant from claiming under a “any occupation” definition after 16 months or more. This 16 month threshold before they apply is important as it is the point where their insurance may be switched off by law due to inactivity under the Protecting Your Super legislation, unless they elect to continue cover).
- Of the 19 funds that we contacted (originally 20 but reduced by one due to a merger), 14 have shown some improvement in their coverage. This compares to only one of the nine funds we didn’t contact.
- We continue our call on all super funds still using ADL type definitions in their policies to remove them in order to ensure no person is paying for poor value insurance simply due to their employment status or occupation.
Introduction
In July 2020 we released a blog post that detailed the prevalence and detriment caused by restrictive definitions of total and permanent disability (TPD) in policies bundled with default superannuation products (MySuper products). We looked at a sample covering more than 70% of default product TPD policyholders in 2020 (7.8 million accounts) and found 97% applied restrictive ‘Activities of daily living’ type definitions to some groups of people (mainly the unemployed and people working limited hours per week). ASIC found these terms were much harder to successfully claim under when compared to standard terms. It found that ADL related claims had an average 60% claims denial rate compared to just 12% for ‘standard terms’. For these groups, who still pay full premiums, the policies represent extremely poor value and can best be described as ‘junk’.
At the end of our report, we called on all super funds to move away from these restrictive definitions and for the industry to standardise terms to ensure no-one is unfairly discriminated against. Later in 2020 we sent letters to the 20 funds in our sample that had the most restrictive terms: these funds applied ADL type definitions to anyone unemployed for more than six months.
Our next blog post detailed their responses – some removed ADL type definitions and many took steps to reduce the situations in which the ADL type definitions would be applied, thereby reducing the scale of detriment. We followed up with further letters in Spring 2021 and this post details what steps this subset of funds has taken as of October 2021. It also compares the action taken between funds we did and did not write to. In addition, we have reviewed the 2021 insurance guides of the original sample (slightly altered due to merger activity and some additions to enhance market coverage) so that we can provide a comparison of the prevalence of ADL type definitions in 2021 compared to 2020, as well as how they are applied across the market.
Data
Since the original analysis of fund insurance guides in May 2020 there has been some merger activity which has affected our sample and we have added two policies to enhance coverage. The overall impact on the sample is shown in table 1.
Table 1 – Changes to TPD policy sample (May 2020 to September 2021)
| Steps | Policies |
|---|---|
| 2020 policies | 32 |
| Add two policies for coverage | +2 |
| Two mergers between sample funds | -2 |
| Two products were wrapped up | -2 |
| 2021 policies | 30 |
In September 2021 we analysed the current policy of the 30 default insurance policies of the 28 funds in our sample. Together the default products of these 28 funds cover 85% of all default TPD policyholders.
Findings
Prevalence of ADL type definitions in 2021 vs 2020
Table 2 – Prevalence of ADL type definitions
| Definition type | Percent 2020 | Percent 2021 | Difference |
|---|---|---|---|
| ADL only | 56.2% | 33.3% | -22.9% |
| ADW only | 34.4% | 40.0% | 5.6% |
| ADL and ADW | 6.2% | 6.7% | 0.5% |
| None found | 3.1% | 20.0% | 16.9% |
Table 2 compares the percentage of policies with particular ADL type definitions in 2021 and 2020. The percentage of policies with no ADL type definition has increased from 3% to 20%. ADL definitions are less common, while “Activities of daily working” definitions (a similar and similarly restrictive definition to ADL’s) are somewhat more common. Policies with both types of restrictions have slightly increased by half a percentage point.
Groups impacted by ADL type definitions in 2021 vs 2020
Table 3 – Groups impacted by ADL type definitions
| Group | Percent 2020 | Percent 2021 | Difference |
|---|---|---|---|
| Unemployed people | 94% | 80% | -14% |
| People working less than set hours per week | 47% | 27% | -20% |
| People working in certain occupations | 16% | 7% | -9% |
Table 3 compares the percentage of policies that apply ADL type definitions to a particular group. In our sample, where a policy has an ADL type definition, it always impacts unemployed people but since a number of funds have removed their ADL type definitions entirely, the percentage of policies that discriminate against the unemployed has fallen by 14 percentage points. People working less than a set number of hours per week (typically 15 hours) are impacted by 27% of policies, a 20 percentage point drop from last year. Lastly, people working in ‘special risk’ or ‘hazardous’ occupations are also less likely to be discriminated against, with only 7% (two policies) still pushing them into restrictive TPD definitions.
Policy changes in funds we wrote to vs others
Figure 1 – Policy changes in funds we wrote to and others
Figure 1 demonstrates that 8 of the funds we wrote to have now removed or are removing ADL type definitions from their policies. A further six we contacted have implemented a significant reduction in the restrictiveness of terms. A significant reduction is defined as meeting a benchmark where the policy applies no hours based or hazardous terms and only applies it’s unemployment term after at least 16 months unemployment (aligning with the point where by law insurance is switched off due to account inactivity unless an election is made to keep it). By contrast, none of the funds we didn’t write to is removing their ADL type definitions and only one has significantly reduced the restrictiveness of their terms.
The state of the market
Figure 2 – How unemployment terms are applied in our sample of policies
Figure 2 shows how the funds that have yet to remove unemployment eligibility terms are applying them.1 The figure shows the duration of unemployment allowed by the policy before the person is forced to claim for TPD under a restrictive definition (including ADL type definitions).
A subset of these fund’s policies apply hours and/or hazardous occupation terms that make them more restrictive than policies which only apply ADLs after a period of unemployment.
Figure 2 shows that 15 of the 22 funds apply unemployment terms before 16 months. We consider policies that only apply these terms after 16 months (and have no hours or hazardous terms) to be minimally restrictive but still unjustifiable as they discriminate against the group of long term unemployed that opt to retain their insurance. We have not seen evidence of funds pro-actively contacting these customers to let them know they are paying for insurance they will find it extremely difficult to claim upon. This is another measure funds could take to ameliorate the harm caused by maintaining ADL type definitions.
Conclusions and next steps
We have found significant changes in the prevalence and impact of ADL type definitions in default TPD policies. A third of our updated sample have either removed or are removing ADL type definitions from their policies. Encouragingly 57% of policies have now either removed or significantly reduced the impact of ADL type definitions on their customers.
That is a significant reduction in detriment for policyholders in a single year, but more work needs to be done. 43% of policies still confine the claimant to restrictive definitions before 16 months of unemployment, with one default product removing eligibility for the “any occupation” definition after just three months. We call on all super funds that still apply ADL type definitions to follow their peers and remove them from their products. This will help ensure no consumer is paying for poor value junk insurance they will find it extremely difficult to claim upon.
¹One fund, Active Super, only applies an hours term – 15 hours per week averaged over 12 months prior to date of disablement. For this fund, we assessed how many months a person who usually works full time (35 hours per week) could be unemployed and still meet the 15 hours per week on average over 12 months requirement. This is a conservative estimate as many people do not usually work full time, and so would fail the test with less than six months unemployment.↩︎