Insurance in super was only a bit-part player in the banking royal commission drama.
It did get a run in the evidence about premiums deducted and claims but wasn’t chopped up and thrown into the lions’ den like the banks and financial advisors.
Nevertheless, Commissioner Kenneth Hayne did make a handful of recommendations which will help reshape the landscape of group insurance in super, hopefully for the better.
The most important is the recommendation that Treasury lead a review to determine whether default MySuper group life policies could and should have legislated key definitions, terms and exclusions.
Importantly, the yardstick for the review is to be the practicability and likely price impact of such standard terms.
Similar recommendations were made by the Parliamentary Joint Committee on Corporate and Financial
Services and the Productivity Commission.
The Life Insurance Code of Practice set a goal of developing standard definitions in its second iteration which is currently under development.
It is noteworthy that we already have a binding TPD definition for default MySuper products under section 68AA of the SIS Act in Regulations 1.03C.
However, this has in practice been ignored by a number of trustees in negotiating group life contracts with default cover which deviates from the standard permanent incapacity definition.
This includes defaulting members in ‘high risk’ occupations to much narrower definitions.
It is crucial that this practice be stamped out as part of the review, which must include consumer as well as industry representation.
In fact, this can be the opportunity to develop a big design piece tying in group life cover in MySuper and Choice products, early access to super, and giving insurers the ability to offer limited medical/rehabilitation support.
A related recommendation was that any particular status attributed to members by insurers must be fair and
reasonable. Accordingly, classifying members in particular occupations as ‘high risk’ or limiting/excluding cover for people with mental must be fair and reasonable.
This will impose a positive obligation on insurers and trustees to justify such limitations on cover.
The Commission recognised the potential conflict of interest that may arise when a trustee
negotiates a group life policy with a related entity.
To deal with this, they recommended that the trustee must obtain independent certification that the insurance contract is in the interest of the members and provide this to APRA.
Another recommendation was to mandate the Insurance in Super Code and for the terms
of group life contracts to be made enforceable. Currently,the Code is both voluntary and without external oversight or sanctions.
A number of other recommendations impact the group life sector.
These include: the changes to the duty of disclosure (by substituting a duty to take reasonable care); remedies for breaches (by returning the innocent nondisclosure avoidance remedy to the much narrower pre-2014 remedy);
applying unfair contracts legislation to insurance products (including group life insurance) and defining
‘main subject matter’ narrowly; and lifting the claims handling exemption for insurance from the definition of
‘financial service’.
Insurance in super has delivered affordable and accessible life insurance to millions of Australians who
would otherwise have none.
However, it has developed problems with affordability and availability in the last five years and has unnecessarily depleted the retirement incomes of some workers.
The royal commission recommendations are part of this overall design piece and it is heartening that there appears to be bipartisan support for their adoption.
Some tinkering may be needed to implement some of the recommendations, but overall they represent a
significant step forward.
