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20-323MR ASIC report explores how to measure ‘value for money’ in default insurance in superannuation
ASIC today released a report on measuring the value for money that Australians receive from default insurance provided by their superannuation funds.
Superannuation trustees must offer default death and permanent incapacity insurance benefits on an opt-out basis to most members in a MySuper product. Many trustees also choose to offer default insurance to members in Choice superannuation products.
Report 675 Default insurance in superannuation: Member value for money (REP 675) explores metrics that can help superannuation trustees analyse the value for money of default insurance and deliver better outcomes for members.
In producing REP 675, ASIC considered publicly available data on default insurance offered by 20 large MySuper products, which at 30 June 2020, covered 82% of MySuper member accounts.
ASIC also used its compulsory information gathering powers to obtain more granular data from a sample of 11 mostly large superannuation trustees for a six-year period (FY 2013-14 to FY 2018‑19). These trustees held an estimated 40% of superannuation accounts with insurance at 30 June 2019.
ASIC engaged directly with a range of trustees to understand their insurance arrangements and how they measure the outcomes their members receive from default insurance.
ASIC Commissioner Danielle Press said, ‘Many Australians hold life insurance through their super fund. Almost 10 million superannuation accounts have insurance attached, and a majority have the default insurance offered by the fund. The decisions superannuation trustees make about default insurance arrangements are important because most fund members stay with the default.
‘The findings in ASIC’s report will help trustees take meaningful steps to enhance member outcomes and to meet their existing and new regulatory obligations. These include the member outcomes assessments overseen by APRA and the design and distribution obligations (DDO) overseen by ASIC, which commence in October 2021,’ she said.
REP 675 compares some measures of value for money, with a focus on outcomes for members, across superannuation trustees and for distinct member cohorts. Each of the measures of value for money has its own strengths and weaknesses, and trustees will need to consider a range of indicators to measure value for members.
The report highlights that:
- There is wide variation in default cover offered. Across MySuper products, ASIC found a large amount of variation in the types and level of default cover. For example, some large MySuper products offered over 20 times as much default cover as others. The premiums members paid for default cover also varied widely. Differences in price are partly due to different levels of cover, but also other factors including the average risk level of the membership and the generosity of terms and conditions.
- Different cohorts of members can receive different outcomes. ASIC’s analysis of detailed insurance claims data provided by trustees identified that some cohorts of members with default insurance, such as younger members and those in insurance policies with more restrictive terms and conditions, may be receiving relatively low value. Such outcomes raise questions about the appropriateness of the default insurance design and fairness between groups of members.
- Trustees found providing member insurance data challenging. Some trustees were unable to properly identify which members had default insurance, and some struggled to explain patterns in the data they provided to ASIC. Those with the most complicated insurance designs and product structures tended to face the most issues.
According to ASIC’s analysis of the claims data from the larger superannuation trustees, insurers estimated that superannuation members with default insurance, as a whole, will be paid up to 79 cents in claims for each dollar of insurance premiums they were charged over the six year period to FY 2018-19.
Ms Press said, ‘Most default insurance cover is complex. Trustees play a pivotal role in designing default cover and negotiating with insurers on behalf of their members. I encourage trustees to examine the outcomes they are delivering to members through default insurance and to proactively consider how to deliver value for money in a way that is financially sustainable.’
ASIC has been working on a number of initiatives designed to improve trustee practices around insurance in superannuation (see REP 591, REP 646 and REP 633). ASIC recently released independent research into members’ experiences of engaging with their insurance in superannuation (refer 20-293MR, REP 673) and communicated about default settings on occupational categories (refer 20-309MR). ASIC continues to engage with industry on implementation of the Insurance in Superannuation Voluntary Code of Practice.
Member outcomes and DDO
The Australian Prudential Regulation Authority’s Prudential Standard SPS 515 Strategic planning and member outcomes came into effect on 1 January 2020. Under SPS 515, trustees are required to regularly assess the outcomes provided to members and identify opportunities for improving these outcomes.
From October 2021, DDO will apply to Choice products in superannuation, including any attached insurance. These obligations will require the industry to design fit-for-purpose products that meet consumer needs, and to take steps to ensure their products are reaching the right consumers.