A Hayne royal commission proposal to streamline life insurance contracts held within MySuper accounts could result in a blow-out in costs and a consequent hike in premium rates.

The final report from the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, released just over a week ago, recommended that Treasury investigate – in consultation with the industry – whether standard terms and conditions for insurance contracts in default super were needed.

Additionally, the royal commission recommended that Treasury examine the practicality and price effects of having standard definitions of total and permanent disability (TPD) cover in group life policies.

While universal contracts might allow better comparison of products, KPMG partner Adam Gee worries they might also drive increases in premiums where, for example, existing insurance definitions are required to be widened.

“It’s difficult to talk about overall impact on pricing, given we have little guidance on where the streamlined terms and conditions may land as a result of this recommendation,” Gee says. “That said, where disability definitions are narrow, a wider definition could cause a rise in claims and, consequently, an increase in premium rates.”

On the other hand, the superannuation specialist says there could be some winners from the streamlining of insurance terms and conditions. As Gee sees it, if Treasury and the industry land on a tighter definition, then funds that now use a broad definition of disability could potentially move to lower premiums.

Lower prices, less coverage

“The only challenge with this situation, however, may be that fewer claims may actually be paid to members, if payment terms are tightened.”

This point was highlighted by REST, the industry superannuation fund, which sounded a cautionary tone that stricter definitions could lead to a reduced price but also less coverage.

“REST would not like to see a universal definition created that removed cover for those who have different occupation patterns or one that created an excessive hurdle to meet at the point of claim,” a spokesperson for the fund said.

A major concern for REST was that creating universal definitions without significant consultation and consideration could make matters worse, the spokesperson said. The fund warned of unintended consequences that could limit coverage for those who work part time or casually.

KPMG’s Gee is concerned that a lack of tailoring of products for members could leave them worse off.

“Funds that maintain highly tailored insurance definitions (for dangerous occupations, for example) may no longer be able to make payments under these specific conditions, should these funds be required to move to streamlined definitions for insurance,” he explained. “This may result in a smaller number of members being entitled to claim on their insurance policies within superannuation.”

There is far from a consensus on the issue, which makes the prospect of such far-reaching change daunting.

On balance, Grant Peters, EY Oceania insurance leader, is positive about standardised contracts. He said they would help member understanding and engagement, create more consistency with price increases, and make it easier for default arrangements to be moved from one insurer to another.

Hayne recommends ‘best interest’ inquiry

The Hayne report also recommended that the inquiry examine whether group life cover in MySuper is fair, targeted and in members’ best interests. Experts say this inquiry is long overdue.

John Berrill, principal at Berrill & Watson, said the royal commission highlighted a serious problem: some funds have flipped people from a standard definition to a much harsher definition, making it tough for them to claim. The industry stalwart has long bemoaned the fact that such changes have made cover for some super members virtually useless.

“Members think they are getting the usual definition of TPD cover when they’re not,” he said.

Another recommendation in the Hayne report relating to group life cover looked to amend Prudential Standard SPS 250 to require particular statuses attributed to insured members (for example, ‘high-risk’) to be fair and reasonable.

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