Andrew Bragg

The current structure of Australia’s insurance framework is inhibiting product innovation, creating underinsurance and unnecessary public sector cost, the Financial Services Council said yesterday.

In its phase two submission to the Financial System Inquiry, the FSC said: “Regulation must allow insurers to meet consumers’ needs.”

Andrew Bragg, Director of Policy for the FSC said: “Australia’s insurance framework is too fragmented. It requires separate licences for individual products.”

“This prevents insurers from offering multi-purpose products such as combined health and life insurance policies to meet the needs of Australian consumers.”

“We are recommending to the Murray Review that the prudential framework be streamlined so the industry can develop innovative products that better meet the needs of consumers,” Mr Bragg said.

The FSC also said private disability insurance could be leveraged to meet the ballooning costs of disability welfare in Australia and to reduce the increasing pressure on the Commonwealth Budget.

“Life insurance can be the private sector solution to the increasing budget costs of welfare, just as superannuation is to an aging population and private health insurance is to managing health care costs,” said Mr Bragg.

“Modelling by Deloitte Access Economics shows if the government treated private disability insurance in a similar way to private health insurance, $8.5 billion in net savings could be achieved.”

“The costs of the National Disability Insurance Scheme and Disability Support Pension must be sustainable and should not be monopolised by the government.”

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John Brogden

Research for the Financial Services Council released yesterday shows Australia has the third highest superannuation fund returns in the world.

The research was prepared for the FSC by Deloitte Access Economics to benchmark fees and returns to Australian superannuation funds against comparable countries.

“Of the twelve countries included in the study, Australia has the third highest returns,” John Brogden, CEO of the Financial Services Council said.

In his keynote speech to the FSC Annual Conference yesterday Mr Brogden said: “The (Murray) Inquiry has rightly asked how cheap or expensive the Australian superannuation system is when compared globally.”

New data from Chant West shows the median return since the start of compulsory superannuation 22 years ago to June 2014 was 8 per cent per annum which is 5.4 per cent above inflation. This is net of investment fees and tax and well above the typical return objective of CPI plus 3.5 per cent.

“On any measure this is definitive evidence that Australia’s superannuation system is working,” Mr Brogden said.

“The debate on fees is less definitive.”

The FSI interim report observed that there is a lack of competition and fee sensitivity in the superannuation sector and operating costs appear above international standards.

“The problem is that assumptions made to date been based on old data which has failed to compare like with like,” Mr Brogden said.

“We need to look at the cost and value of the superannuation system and the funds management industry,” Mr Brogden said.

“The returns that members receive from their superannuation funds over the long term are the most important factor. Focusing on cost alone is dangerous and lazy.”

Research conducted by Rice Warner Actuaries for the FSC shows that MySuper has had an immediate and significant impact on fees in default superannuation.

Superannuation fees have shown a steady decline over the past decade driven by greater competition.

The commencement of MySuper in July 2013 has had a dramatic impact on fees.

Between 2011 and 2013 fees in MySuper default-like products declined from 0.92 per cent to 0.73 per cent.

Given that 80 per cent of Australians default, this means the vast majority of Australians are receiving the benefit of MySuper immediately.

Mr Brogden said: “MySuper must be given time to deliver what the Cooper Review intended it to do − that is, lower costs through competition. And it needs to be given the opportunity to go further through reform of the way default superannuation funds are selected by the introduction of an open, competitive and transparent market.”

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The Financial Services Council’s annual conference is being held at the Cairns Convention Centre from 6 to 8 August. Further details can be accessed at: http://fsc.org.au/events/fsc-annual-conference-2014-accelerate/home.aspx

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