Making insurance in superannuation an opt-in arrangement for members aged under 25 or with low-balance or inactive accounts will lead to a 50% drop in group cover and a 42% drop in premium, KPMG says.

This could result in a 26% rise in premiums for those remaining insured, according to a paper on changes announced in the federal budget.

Under such a rise, projected retirement benefits will erode by 7.3%.

Minister for Revenue and Financial Services Kelly O’Dwyer has made reducing insurance and administration fees in super funds a focus of her role.

The drop in premium collected is expected to be greatest among members with balances below $6000, with a 37% reduction across life insurance, total and permanent disability and income protection policies.

Premium collected from accounts in which no contribution has been made for 13 months will drop by 26%, KPMG says.

Removing default cover from low-balance or inactive accounts will increase the average age and risk within the remaining insurance pool. Australian Prudential Regulatory Authority statistics show up to 35% of members are aged under 25 in some funds, KPMG says.

Affected members will have 14 months to opt in to retain their cover.