A national insurance scheme for long-term disability care and support is a laudable concept but the devil is in detail of design and implementation. While an ill-designed scheme may be costly, having no scheme may prove more costly in the long term.
Much can be learned from existing schemes and useful mechanisms imported from existing products. Disability is a hidden cost of life for a large minority, and at some stage in retirement a major cost for many. Insurance products and schemes can help.
A priority of the new Government will be to address the economic and social costs of disability. An aging population, longer work hours and consequent pressures on carer families and community networks are likely to mean growing pressure for action. While Australia’s social security and health care systems provides universal services based on need, there is currently no similar entitlement to disability care and support services.
The Productivity Commission has been requested by Assistant Treasurer Senator Nick Sherry to undertake an inquiry into a National Disability Long-term Care and Support Scheme. The Inquiry assesses the costs, cost effectiveness, benefits, and feasibility of such a scheme.
Australian Centre for Financial Studies (ACFS) stated its broad support for the objectives of the Inquiry. ACFS Director Prof Deborah Ralston noted that “disability care and support services are a vital part of our social fabric” and that “disability insurance is a key component of society’s approach to dealing in a just fashion with the economic and social costs that disability creates”. ACFS assesses that the current role of insurance-based compensation for disability is under-estimated by both the community at large, and also the financial sector.
ACFS has established a Research Reference Group of academics, practitioners and regulators for Insurance. It has a key objective of building a dynamic insurance research agenda for academic staff and students to be of direct relevance to industry and government. Impetus for this ACFS submission came out of that group.
ACFS focused its submission upon existing and potential insurance schemes and addressed the following specific questions:
- What is the range of current disability insurance schemes in Australia and what lessons can be learnt from the experiences of those schemes (including underinsurance, claims experience)?
- What impediments are there to insurance schemes for dealing with particular types of disability claims?
- What relationships between insurers as payers of claims and providers of disability support services are appropriate? Fault vs. No fault; Equity issues – outcomes vs. causes; Ongoing care costs; Compensation amounts; and Insurer Solvency
- What is the appropriate role for Government funding versus private insurance in dealing with disability coverage? Common Law Settlements vs. Insurer payouts; Structured settlements; Special Disability Trusts; Pension Age
- What innovations in privately provided disability insurance schemes should be promoted/supported by Government and how?
More questions than answers remain. Some conclusions can be drawn.
- A lesson from failed schemes is that it is better to fail fast and fail small. There may be value in any national scheme being developed and refined in proto-type on a smaller scale e.g. in one state or region or product area.
- Specific insurance schemes provide protection for producers and service providers, and compensation for victims, for disabilities arising from specific events. These include medical indemnity schemes, public and private liability schemes, sporting injury schemes, crime victims’ compensation schemes.
- For the individual, insurance against particular life events such as total and permanent disability (TPD) could have greater encouragement from government. For instance, tax neutrality for friendly society products.
- Aspects of each of the pooled schemes, and individual products, may be appropriate to import into a National Disability Scheme.
- It would appear that lump sum payments increase the risk of eventual depletion of funds while there is still a need for care, forcing beneficiaries into reliance upon social welfare arrangements.
- Annuity-type products may be a solution. What scope is there for modification of taxation arrangements to allow for common-law court-determined settlements to be paid as structured settlements in the form of an annuity?
- In assessing the cost of a national scheme, it is important to take into account the scope for reduction in other social security costs. For instance, a well designed disability care and support system may reduce the number of families on welfare by making available more professional carers.
- Concerning compensation it appears that no current approaches allow sufficiently for the inflation rate of medical and care costs relative to general inflation. And normal discount rates may understate the appropriate risk based rate of return, with both factors creating a downward bias to compensation amounts.
ACFS Research Director Prof Kevin Davis noted that “issues of adverse selection and moral hazard are prevalent and unavoidable when insuring against the costs of disability. They may be mitigated but at cost.” For instance, testing for genetic predispositions to various chronic diseases is now possible but Government must decide whether broad use of these techniques, which would lead to differential charging, is consistent with broader societal objectives. Similarly, technology may be applied to determine risk profiles based on behaviour e.g. the tendency of vehicle drivers to speed can be tracked. Arguably the use of the technology may compromise civil liberties.
Disability insurance is a “long tailed” risk business. Any proposal for mandating the involvement of commercial providers in any scheme must consider the solvency of insurers. Prof Ralston commented that “the greater involvement of non-statutory bodies would support innovation over time, and would spread the risk, but there must be opportunity for profit
A key issue is scheme coverage. Prof Davis asked “Should there be a national scheme for inherited or genetically based disabilities, should such a scheme also cover accident induced cases? This might reduce the potential role for insurance schemes and would likely leave the taxpayer carrying more of the burden.”
View media release and Submission to Productivity Commission on ACFS website
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Australian Centre for Financial Studies
The Australian Centre for Financial Studies facilitates industry-relevant and rigorous research and consulting, thought leadership and independent commentary. Drawing on expertise from academia, industry and government, the Centre promotes excellence in financial services. The Centre specialises in leading edge finance and investment research, aiming to boost the global credentials of Australia’s finance industry; bridging the gap between research and industry and supporting Australia and Melbourne as an international centre for finance practice, research and education.
The Centre provides access to and links between academics, finance practitioners and government and draws on expertise and experience from across these groups, to facilitate and disseminate knowledge creation and transfer throughout the greater finance community via its various activities.
The Australian Centre for Financial Studies (previously known as the Melbourne Centre for Financial Studies) is a not-for-profit consortium of Monash University, the University of Melbourne, RMIT University and Finsia having commenced in 2005 with seed funding from the Victorian Government.
Professor Deborah Ralston
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