Reviewing the governance arrangements around group insurance must be a top priority for superannuation trustees in response to the crackdown on life insurance standards.
Life insurers and their wholesale clients are digesting a barrage of attention from government and regulators. Minister for revenue and financial services, Kelly O’Dwyer, the Australian Prudential Regulation Authority, and the Australian Securities and Investments Commission all released missives on the topic last week.
All of which were pre-empted by the release a few days earlier of the Financial Services Council’s voluntary code of conduct for life insurance sold directly or via advisers. Promisingly, the Association of Superannuation Funds of Australia, Australian Institute of Superannuation Trustees, Industry Super Australia and Industry Funds Forum have all pledged to work alongside the FSC to adapt the new code in a bid to improve consumer protections for the millions of people who pay for default cover via their super fund.
The list of issues that need attention is a long one. It includes policy design, medical definitions, claims handling, fees, and transparency.
Super fund trustees also need to ask tough questions about whether potential conflicts of interest are being properly managed at their fund.
At the heart of this for many funds should be a review of how it was decided which life insurer they purchase death, disability and income protection cover from for their members.
It is notable that most of the big retail super funds that sit within “vertically integrated” retail wealth management businesses, those owned by the big banks and AMP, award the majority of their group life insurance tenders to a provider owned by their parent company.
If a rigorous tender process was adhered to and the in-house option really was the best fit, then no problem.
But in instances where the quality and value of insurance provided to members is not up to scratch, sticking in-house will be increasingly difficult for super fund executives and directors to justify.
It will also become harder for these underwriters to win and retain mandates from other super funds.
Over the weekend The Australian revealed that Westpac Life was the insurer anonymously called out in ASIC’s recent report for rejecting roughly one third of all claims.
Series of ‘embarrassing’ headlines
Head of the bank’s superannuation and wealth management arm, Brad Cooper, was on the defensive in Monday’s edition of The Australian Financial Review, arguing that this reflected the absence of standard reporting guidelines, rather than proof that Westpac had a higher than industry average denial rate.
Either way it is another embarrassing set of headlines that follows a blistering series of stories by Fairfax Media journalist Adele Ferguson into practices at CommInsure earlier this year.
The non-profit industry fund sector is not without its own potential conflicts to manage in the area of insurance.
Premium rebate schemes, where insurers split the difference between expected and actual payouts on a group policy over a year, being a case in point. On the one hand this style of profit sharing arrangement can help boost member balances, but directors must be vigilant to ensure it does not create a perverse incentive to reject valid claims.
As the industry fund sector continues to grow and become more sophisticated, more players might follow in the footsteps of QSuper and move to set up their own insurance arms.
Perhaps we might also see collaborations between industry funds to pool their resources and create new mutual-style insurance businesses.
Initiatives like these have great potential to deliver better value to super fund members, but non-profits with vertically integrated operating models need to manage potential conflicts of interest just as much as their retail rivals.
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