Actions for superannuation trustees 8 min read
ASIC has published its report REP 760 (the Report) examining the progress made by 15 superannuation trustees to improve their insurance in superannuation arrangements since January 2019. The regulator's stream of work looked closely at the improvements the trustees have made in response to issues previously identified in its public communications, as well as a number of insurance in superannuation regulatory reforms introduced over recent years.
In this Insight, we highlight further action superannuation trustees should be taking as identified in the Report against the backdrop of their regulatory obligations.
ASIC's 2022 review
Over the last few years, ASIC has completed a broad range of work to address consumer harms arising from insurance in super.1 In its most recent efforts, the regulator engaged with 15 superannuation trustees to better understand their progress in improving their insurance arrangements in light of previous reviews.
As at June 2022, approximately three million member accounts in the reviewed funds had death and/or Total Permanent Disability (TPD) cover (accounting for about 37% of all superannuation accounts across the industry with death and/or TPD cover), and approximately 800,000 accounts had income protection (IP) cover (accounting for about 20% of all superannuation accounts across the industry with IP cover).
The Report details the findings from its engagement with the trustees throughout 2022. ASIC says that, generally, trustees have:
- insurance design and data: made changes so that members should get better value for money;
- claims handling: taken steps to streamline their claims processes; and
- understanding insurance: improved the way they explain their insurance offerings.
But it was not all good news - room for improvement was found across each of these themes, and we've set out further detail on the action points for trustees below.
Insurance design and data
As ASIC notes, where insurance cover is not well designed, it puts members at risk of paying for insurance that does not meet their needs, is excessively costly, or cannot be claimed upon.
In that context, ASIC took a closer look at how trustees have changed restrictive TPD definitions and found that most of the 15 trustees had taken action to modify or remove them. In terms of how data was being used to improve insurance design, the Report details that most of the 15 trustees had worked with their insurers to make changes to specific terms and conditions, or to the pricing structure, to improve member outcomes and address the risk of low-value cover being provided. This includes removing cross-subsidies, decoupling death and TPD cover, and removing occupational exclusions.
However, there were some limitations in how trustees used data to better understand members’ insurance needs and monitor whether they were receiving the right outcomes. There were also limitations in the way trustees described the target market for the insurance component of their product, and only some target market determinations (TMDs) contained specific insurance-related circumstances that would trigger a review of whether the TMD remained appropriate (in the TMD review triggers).
ASIC also reviewed what actions the 15 superannuation trustees had taken to analyse IP offsets (ie, reductions of insured benefits because of other kinds of income support being provided) and, positively, found that almost all of the trustees had taken steps to ensure they continually assess how these affected outcomes of their membership.
ASIC says that all trustee boards should:
- Restrictive TPD definitions: monitor the outcomes of TPD claims assessed under restrictive definitions (eg 'activities of daily living' or 'activities of daily working') to ensure these definitions do not result in poor member outcomes (such as members paying for cover they are unable to claim on when they need to) and assess whether removing restrictive TPD definitions (or changing the criteria so fewer members are funnelled into these definitions) can deliver better outcomes for members;
- Member outcomes: continue to review whether the insurance they offer is meeting members’ needs and providing value for money;
- Data analysis: collect and analyse data (including data from their insurer) to proactively assess whether members’ needs are being met, what outcomes each member cohort is receiving from a group insurance arrangement (and why outcomes differ across cohorts), assess whether members are receiving value for money, and identify where risks of low-value outcomes (or member harms) may be emerging;
- TMDs: determine if changes need be made to the TMD, to the insurance design, or to distribution channels. Trustees should also check their TMDs to ensure that these clearly describe the target market for their choice superannuation products (including the insurance component) and include appropriate review triggers; and
- IP offsets: obtain and analyse data, including data from their insurer, on a regular basis, to assess how IP offsets affect member outcomes, and consider whether there are specific groups of members for whom it is not appropriate to continue to provide default IP insurance because it provides low or no value.
The 'actions for trustees' relate to a number of specific features of insurance design that ASIC has identified as a concern as part of its 2022 review. These findings are important – the regulator has flagged that it will work with APRA to drive better practices, and will use its regulatory powers where trustees and insurers are not complying with their obligations. It also highlights two of its recent enforcement outcomes, following which the Federal Court imposed penalties amounting to $24 million.2
In that context, ASIC's concerns act as a useful reminder of the raft of ongoing obligations imposed on superannuation trustees in the context of insurance design. This includes that trustees:
- have an obligation to formulate and give effect to an insurance strategy that addresses the kinds and level of insurance to be offered in each fund, having regard to the demographic composition of the beneficiaries of the fund;3
- must only offer insurance of a particular kind, or at a particular level, if the cost of the insurance does not inappropriately erode the retirement income of beneficiaries;4
- must annually determine whether the financial interests of the beneficiaries holding superannuation products are being promoted, which requires them to look at whether the options, benefits and facilities offered under the product are appropriate, as well as whether the insurance strategy is appropriate5 - in this context, RSE licensees are required to set strategic objectives that reflect the outcomes sought for beneficiaries (against which an annual assessment of performance must be made), and APRA expects this process to include the articulation of outcomes as to insurance product design and terms and conditions;6 and
- should also note that the insurance component of a superannuation product will very often affect whether the product is likely to be consistent with the likely objectives, financial situations and needs of consumers for the purpose of the design and distribution obligations.7
As providers of a superannuation trustee service, trustees are also under a more general obligation to ensure financial services are provided efficiently, honestly and fairly8 and, as RSE licensees, to perform their duties in the best financial interests of members.9
Claims handling practices
ASIC had previously found that members faced a number of hurdles in making a successful TPD claim.10 These included onerous processes to lodge a claim, lengthy claims forms, intrusive surveillance, multiple requests for information, long delays, requirements for the member to see multiple medical specialists, and poor communication practices.
The Report identifies that most of the sample trustees have made changes to their end-to-end claims processes. These changes include introducing measures such as death, TPD and IP claims guides that explain how to make a claim, as well as digital claims functionality and vulnerable member policies. They had also taken action to give them greater oversight of insurers' claims handling practices. However, data provided to APRA suggests that trustees need to do more when acting on complaints, noting that the number of disputes about TPD and IP claims increased at the start of the COVID-19 pandemic and remains high. The number of withdrawn TPD claims (which suggest friction in the claims process) is also increasing.
ASIC says that all trustee boards should:
- Analyse complaints: analyse complaints and reasons for claims being withdrawn, to identify frictions and hurdles that members may face when making a claim on their insurance;
- Frictions in the claims process: work together with insurers to proactively address these frictions and hurdles, and to identify ways to enhance the timeliness of claims handling, reduce procedural burdens, enhance transparency and fairness, and tailor the claims process for members experiencing vulnerability or financial difficulty; and
- Oversight of claims handling practices: check whether their oversight of their insurers’ claims handling is structured to drive the right outcomes for members, including the frequency with which they meet their insurers, what processes and procedures relating to ‘procedural fairness’ or ‘show cause letters’ exist, and how they monitor their insurers’ compliance with the Life Insurance Code.
Again, ASIC's recommendations go to a number of obligations imposed on superannuation trustees in the context of claims handling practices. The regulator says that a core aspect of the 'superannuation trustee service' is to assist beneficiaries with insurance claims, and that doing so 'efficiently, honestly and fairly' would require trustees to handle claims in the least onerous manner and in a way that supports consumers, particularly those who are experiencing vulnerability or financial hardship.11
A trustee must also, at a minimum, have a process for monitoring its insurer's performance against agreed service levels for its insurance arrangements.12 This obligation is particularly relevant where the trustee's insurer undertakes claims handling services on the trustee's behalf, and APRA says that a trustee's mechanism for the regular review of its outsourced service providers should support the accuracy of claims information.13
Claims handling and processing times should also form a part of a trustee's annual outcomes assessment under the Superannuation Industry (Supervision) Act 1993 (Cth) (the SIS Act) and SPS 515.14
Helping members understand their insurance
Earlier ASIC work on insurance in super has identified that members experience difficulties when looking for information on their superannuation fund’s insurance arrangements or when seeking to make changes to their insurance cover. It had also found examples of trustees not providing members with appropriate context or balanced communications about how they would be affected by the Protecting Your Super reforms, and deficiencies in the way trustees explained to their members when and how different terms and conditions of the insurance policy apply (including how these affect members’ premiums or cover).
The Report details the positive practices introduced by trustees to improve how they communicate with members about their insurance and to help them make appropriate decisions for their circumstances (eg by the introduction of measures such as standalone annual insurance statements, and by member surveys and/or consumer testing of the usefulness of communications materials). However, it suggests that there is room for improvement in how key terms and conditions are explained to members. In particular, ASIC identified deficiencies in the way occupational categories are described and when (and how) restrictive TPD definitions apply.
ASIC says that all trustee boards should:
- Member data and consumer research: harness member data and consumer research to better understand their members’ needs, behaviours and potential frictions;
- Clarity of communications: ensure member communications and processes are easy to understand, and consider adopting different communications strategies and processes to reflect the diversity of their members’ characteristics, preferences and needs;
- Information as a result of regulatory reforms: give members context on why changes are being made as a result of regulatory reforms, explain how the changes may affect the individual member, provide appropriate options, and provide any other relevant, factual information;
- Testing: conduct robust testing of processes, procedures and member communications when making changes to their insurance arrangements, and work with administrators to proactively identify and rectify system deficiencies so that members do not receive the wrong information or the wrong insurance cover; and
- Terms and conditions: proactively and prominently communicate with their members about key terms and conditions in the insurance policy in a way that helps members make informed decisions about their insurance cover (eg, by using scenarios and case studies), including to clearly explain to members which occupational category they are in (and by using labels that better promote member understanding of the level of risk and cost associated with that category) and to clearly and prominently explain when IP benefits will be offset.
Understanding member data is an important factor in how a trustee complies with its obligation to provide insurance that is appropriate, and will be key to evidencing that the trustee has supported member outcomes. Trustees should continue to utilise the data they are required to maintain for the purpose of SPS 250 for these purposes.15
Trustees are otherwise obliged to make disclosures about superannuation products, including insurance provided through superannuation, under the Corporations Act 2001 (Cth). ASIC's guidance on good disclosure principles16 has been issued primarily to support trustees in their preparation of product disclosure statements (which often incorporate information on insurance by reference). However, those principles also have general application in terms of how trustees communicate with members. ASIC may take enforcement action if it deems a communication to be 'misleading and deceptive', and trustees should take particular care when communicating about insurance in superannuation to ensure that all communications are consistent with these principles. That means that information provided to members should promote an understanding of the insurance offering and highlight important information about the cover, its terms, exclusions and pricing.
Next steps
As ASIC notes, some of the actions identified in the Report are steps that trustees can take immediately. Others, particularly those that will need insurer engagement, will need to be planned in advance of the next periodic review of the insurance arrangements (eg when the existing group insurance arrangement comes up for renewal).
ASIC expects trustees to work collaboratively with their insurers in taking action to address its findings. Trustees and their insurers may wish to table the Report's findings at their next relationship meeting, to discuss steps they can take to support fund members.17
Footnotes
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See the full list at Appendix 1 of the Report, which summarises ASIC’s key findings and expectations in reports and media releases about insurance design and data, member communications and engagement practices, and claims handling practices.
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Section 52(7)(a)(i)-(iii), SIS Act.
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Section 52(7)(c).
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Section 52(9) and 52(11)(a) and (c), SIS Act.
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Prudential Standard SPS 515 Strategic Planning and Member Outcomes (SPS 515), [8], and Prudential Practice Guide 515 (Strategic and Business Planning) (SPG 515), paras 11 and 13.
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Pt 7.8A, Corporations Act and ASIC's Regulatory Guide 274 (Product design and distribution obligations), RG 274.132.
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Section 912A(1)(a), Corporations Act.
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Section 52(2)(c), SIS Act.
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See ASIC's REP 633 Holes in the safety net: a review of TPD insurance claims.
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ASIC Information Sheet 253, Claims handling and settling: How to comply with your AFS licence obligations.
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Prudential Standard SPS 250 Insurance in Superannuation (SPS 250), [29].
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Prudential Practice Guide 250 Insurance in Superannuation (SPG 250), para 21.
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SPG 250, para 24(b).
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SPS 250, [15].
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ASIC Regulatory Guide 168 Disclosure: Product Disclosure Statements (and other disclosure obligations).
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Noting that SPS 250 (at [29(a)]) says trustees should maintain regular contact with the insurer at an appropriate frequency and level of seniority.