Insurance offered through superannuation funds is currently under close scrutiny by APRA, ASIC and the Royal Commission into the Banking, Superannuation and Financial Services Industry.
At issue is determining the balance between premiums paid for insurance and the erosion of retirement benefits. Insurance is a significant member benefit under Group Policies and is generally provided with no underwriting (medical checks/forms) for new fund members who meet the eligibility criteria.
Members benefit greatly from Group Policies which provide insurance at wholesale rates as the risk is pooled among the members of the fund. Premiums are generally cheaper than retail rates. It is significant to note that it is estimated that 71% of life insurance cover in Australia is provided through superannuation funds (Rice Warner 2016, Insurance through Superannuation). This is a clear benefit to individuals in times of illness or accident as well society in general and governments who have reduced social security obligations.
Industry superannuation funds have formed the Insurance in Superannuation Working Group (ISWG) which aims to identify any defects within the group policies and to generally improve the standard of group insurance in the areas of product design, price, member service and claims processing.
ISWG has produced an Insurance in Superannuation Voluntary Code of Practice which seeks to address account balance erosion due to insurance premiums, claims handling procedures, member communication and data management.
A primary objective is to ensure that automatic insurance in superannuation is cost effective and to make sure that communications to members are written in clear language which is comprehensible to everyone. Trustees have to consider the implications of the Code including their current contractual arrangements with their insurers and comply with the Code no later than 20 June 2021. ISWG stated its view of insurance provided through superannuation to “support the purpose of superannuation by providing a measure of financial support to members and/or their families if the member is prevented from working, either temporarily or permanently, to retirement age by death, terminal illness or ill health”.
Some of the key features of the code include:
• appropriate and affordable cover
• premium level (should not exceed 1% of salary)
• cancelling cover should be made easier (by phone, email or in writing)
• lack of contributions (measures to advise members with low account balances such as improved communication and letters of warning)
• thirteen months after the last eligible contribution cancel Income Protection cover if the account balance is less than $6000
• more detail regarding insurance on the members’ annual statements
• greater clarity of the steps involved in making a claim including greater explanation to members of the Trustee’s role and the insurer’s role
• a detailed explanation including reasons why a claim was not accepted, and
• time periods for responding to various events such as claims in progress and a review of the insurer’s decision.
As the Code is voluntary superannuation funds will be provided with the options of joining it, joining parts of it or not joining it. As the overriding Trustee obligation is to act in members’ best interest, there may be cases where the implementation of the entire code could be too expensive and would not actually be in the members’ best interest such as a case where a fund must redesign entire insurance policies or other existing contracts.
Without doubt the Insurance Code seeks to improve the member experience when making a claim as well as providing members with clear, concise information on how their insurance actually works. If implemented in full or in part, it will hopefully improve member engagement with their fund as statistically over half of the insured population in Australia does not even know they have insurance.