Super industry urged to lift its game on life insurance

The regulator has made the calls in its new report, Insurance in superannuation: Industry implementation of the Voluntary Code of Practice (REP 646), commenting on the industry’s implementation of the Insurance in Superannuation Voluntary Code of Practice.

The code, which commenced from July last year, has set standards of practice with the aim of improving industry conduct across benefit design, claims handling and communications to members. 

Around 70 per cent of superannuation trustees are adopting the code in whole or in part, but full implementation is not due for completion until 30 June 2021. 

Around 13 trustees were said to only commit in part. And in term of trustees’ code implementation, only four transition plans passed the test for indicating they would achieve full compliance by June this year. A much larger number (29) do not expect to be fully compliant until the final cut-off date.

ASIC has engaged with industry to understand how the code is benefiting super members since January. The regulator has been working in tandem with APRA to improve consumer outcomes from insurance in super.

It met with 18 super trustees, two major super administrators and three key industry bodies, as well as conducting a “mystery shopping exercise” and a website analysis on the more than 100 trustees that had signed up to the code.

Since it was implemented, the code has seen some progress. ASIC reported across trustees, there are shorter durations for claims and complaints processing, there has been improved communication and trustees are focusing their attention towards potential improvements.

But while there have been some improvements, ASIC says a substantial amount of work needs to be done. ASIC commissioner Danielle Press commented there is significant change occurring in relation to insurance in the space.

“We identified a number of inconsistencies in implementation of the code, relating to fundamental aspects such as which members are covered by the code, the controls around balance erosion, and calculation of time frames for claim processes,” Ms Press said.

“Also, trustees are continuing to leave vulnerable members behind – they need to have better defined policies and processes for those with unique needs.”

Members could easily lose default cover 

The scope for default insurance within the segment is significant, with around 12 million Australians holding life insurance within their super. Of these people, an estimated 80 per cent (9.6 million) hold some form of default life insurance.

Some industry participants such as Rice Warner, consider Australians as hugely underinsured, noting that the problem would be even more acute in the absence of default life insurance. 

MLC believes financial advisers will be fundamental to the success of the Aussie life insurance industry. In a recent report on the cost of providing life insurance through advice, it stated: “Unless educated about their mortality risk by a financial adviser, or defaulted into group insurance through superannuation, few Australians take out life insurance through their own volition.”

With legislated reduced commissions coming into play, MLC has predicted financial advisers looking to provide consumers with life insurance will have to decrease their business costs by as much as 20 per cent to 25 per cent.

But for the majority of Australians gaining it through super, consumer classification with the strongest protections in super is easily lost, according to ASIC’s report. Certain protections are only being provided to default members in a number of funds, who are defined and classified as “automatic insurance members” in the code. 

These protections included the types and levels of default cover provided and when cover starts and stops and providing default insurance that is appropriate and affordable for members.

However, if members engage with their insurance, even in just a basic manner, they could easily lose their status as automatic insurance members. 

ASIC stated in its engagement with industry, it found cause for concern to find “various interpretations” of the term “automatic insurance members”. Some trustees were said to be seemingly unaware of the term’s potential for a significant proportion of members to lose protections.

Regulator pushes for industry standardisation

Across the industry, there were inconsistent approaches to balance erosion, with trustees using different approaches to calculate an estimated salary – for some, it allowed themselves to charge “significantly more” than 1 per cent of members’ current salary.

As a result, the regulator noted it will be necessary to arrive at a standardised method for the calculation of the 1 per cent premium-salary threshold. It also thinks trustees should be required to be more transparent about how the salary cap is calculated.

The code has also set standardised timeframes for claim and complaints turnaround, but ASIC has cautioned trustees that the prescriptions are merely a guideline: the regulator expects trustees to “do better”. 

For claims, the code requires trustees to review an insurer’s adverse decision on a claim within 15 business days. 

Vulnerable consumers left behind

ASIC has said there are gaps in the code around catering to vulnerable members, urging the industry to better support individuals with specific needs. 

It wants trustees to recognise there are problems where they too often rely on members to self-identify as vulnerable, that some trustees rely on the members authorising third parties to act on their behalf, that most trustees have no reference on their website to supported services and some funds are too reliant on their call centre agents to act as interpreters.

“When we asked trustees to tell us who their vulnerable members are, almost all responded that they treat ‘all members as vulnerable,’” ASIC’s report said. 

“While there is some awareness within the industry of types of situational vulnerability (e.g. exposure to a traumatic life event that leads to an insurance claim), trustees do not have policies and processes in place that reflect this in practice.

“It was notable that only a few trustees have policies for vulnerable members, and that these policies are often not well defined. A majority of trustees [appear] reluctant to engage with vulnerable members in a systematic way, and many were unable to demonstrate a good understanding of their membership and their needs.”

The regulator has planned further work looking at issues relevant to consumer outcomes in relation to insurance in superannuation.

It has signalled there will be further reports in the financial year.