22 February 2018
How big is Australia’s underinsurance problem?
Stephen Craft explores why Australians are so ready to protect cars and houses, but not lives and incomes.
ANZ Bank, in its life insurance paper, The case for change, argued that declining trust and to an extent, complex products, have contributed to Australia’s chronic underinvestment in life cover.
But how big is the underinsurance problem — and what should insurers and advisers be doing about it?
Stephen Woodcock, a senior lecturer in the school of mathematical sciences at the University of Technology, Sydney, says we can measure underinsurance in two ways, by comparing:
He says Australians have consistently fallen short on both measures.
“In terms of the domestic problem, most observers have relied on reports by the consultants Rice Warner,” he says. “This is a good guide to the scale of the issue domestically … it uses the same methodology each year, so you can observe trends in the data.”
Woodcock says Rice Warner data reveals a clear pattern of underinsurance reaching back more than 15 years. It’s most recent report, found a staggering $1.8 trillion gap between current levels of insurance and the cover Australian families would need to maintain their quality of life until retirement if affected by death or disability. It also found that the median level of:
How does insurance in Australia compare internationally?
Comparing Australia’s underinsurance to other nations is more complex, says Woodcock. That’s because each country has vastly different structures for health and insurance systems.
“For example, health cover uptake in the UK is vastly lower than in the US, but the state burden of healthcare for the National Health Service doesn’t apply there,” says Woodcock. “When we compare the ratio of gross premiums per capita, we find that the rate of insurance premiums paid in Australia is about half that of the UK and about a third of that in the US.”
Australia was ranked 15th by the Organisation for Economic Co-operation and Development in 2015 for overall spending on life insurance premiums at around 3.5 per cent of gross domestic product – about half the level of Italy and a fraction of the spending by front-runners Luxembourg, Ireland and Britain. Our level of spending is similar to that of Finland, Norway and Germany; countries which Woodcock points out have highly developed national insurance schemes. However, we do perform significantly better than New Zealand, which is in 29th place.
Woodcock says the gap is particularly large when it comes to income protection, with a 2016 report from Zurich and Oxford University concluding that Australians have some of the lowest levels of cover in the world.
The report found that just 27 per cent of Australians had insurance against a serious illness or disability, compared to 40 per cent of Americans and 63 per cent of Malaysians. And while Australians can rely on government assistance for healthcare and basic living expenses, Woodcock says this lack of cover leaves us vulnerable to a severe impact on quality of life when accident or illness strike. “The issue of underinsurance is not a state one or a basic healthcare one, rather an income and quality-of-life one,” he says.
Woodcock also points out that Australia’s underinsurance problem is primarily a life-insurance issue.
“A Lloyds’ report on non-life underinsurance paints a much more positive picture for Australia, putting us among the better-insured nations,” he says. “It’s largely just in the area of life cover that we fall short.”
Educating Australians on life insurance
So why does Australia have such an intractable problem with life insurance? OnePath head of life insurance Gerard Kerr says while it’s difficult to point to a single cause, cultural factors do come into play.
“Australians are notoriously optimistic and confident people – and while those are good characteristics to have, they can lead us to underestimate the risks we all face,” he says. That perception is confirmed by the Oxford University and Zurich survey, which found that almost one in two Australians believed they had a less than a 10 per cent chance of lost earnings due to disability or illness. The real risk is estimated to be around 25 per cent.
Kerr also says Australia’s distinctive system of compulsory superannuation with opt-out life cover could also be a contributing factor.
“Understandably, many people may simply assume that the cover they have through their super is enough, even though that is often unlikely to be true,” he says.
According to a 2017 report from The Association of Superannuation Funds of Australia, around 70 per cent of life insurance in Australia is held within superannuation, and yet “the level of underinsurance within the Australian community remains high”, with the median level of life cover meeting only 37 per cent of the needs of families with children.
Kerr says that the answer is education, and that advisers are uniquely positioned to inform consumers and help change perceptions about the value of investing in insurance.
“Advisers have a relationship of trust with their clients and a personal connection, so they have a powerful role to play in dispelling myths and reinforcing the importance of adequate cover,” says Kerr.
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