New “Protecting Your Super” regulations set to be implemented next year could have the unintended effect of putting group insurers and superannuation funds more at odds with community expectations, the executive general manager of insurance at research and consulting group Rice Warner says.
Measures announced in the May Federal Budget and due to be voted into law this month will require super funds to offer insurance on an opt-in basis for members who are young, inactive or have low balances. This will create confusion among a cohort of members already notoriously disconnected with their super and related insurance policies, Jenni Baxter said in an interview with Investment Magazine.
“There are going to be a lot of claims that come in and people will get told, ‘Sorry, but you don’t have insurance, we switched it off, we wrote to you, you’re inactive, you’re not yet 25, your balance was too low…we can’t pay the claim,” Baxter said. “Some of those are going to be very difficult situations.
“People are coming from a situation where pretty much everybody is covered to where some subgroups can no longer be covered and no matter what super funds do with communication, that confusion will remain, to some extent.”
These issues will be particularly prickly after the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry’s focus on community expectations, she said, where nuanced exclusions proved to be controversial.
Funds will also need to develop complex risk controls to prevent members from “switching on” their insurance at opportune times by transferring money to take their account above the minimum balance threshold of $6000, Baxter said. Some savvy members might do this with multiple super accounts.
There is also concern in the industry about the time-frame for implementation. The deadline for implementation is currently set for July next year but some submissions for the draft legislation have requested that it be pushed back a year.
“It’s very rushed to bring it in by July next year,” Baxter said. “There’s so much risk around getting things wrong: the risk of getting the communications wrong, the administration wrong, the various flags you need to put in your system about who wants insurance and who doesn’t – getting that wrong. And the insurers have got to price very quickly and might get that wrong.”
In August, despite heavy lobbying from life insurers and funds, the Senate Economics Legislation Committee recommended that the set of budget proposals known as the Protecting Your Superannuation Package be passed with no amendments.
Opposition to the legislation in its current form has come from AustralianSuper, consumer group Choice, life insurance giants AIA and TAL, and others. They requested carve-outs from the bill, which was referred to the committee for review at the end of June.
The task of communicating the changes to members will be enormous, given chronically low levels of engagement with superannuation and insurance.
The new measures coincide with the Hayne royal commission, which will also probably lead to new legislation, after delving into insurers’ claims-handling practices.
Sometimes surveillance and an investigation into a claimant’s medical history are necessary, Baxter said, but insurers will probably be restricted to accessing aspects of a claimant’s medical record that relate to the claim. They will need to find different ways of verifying whether a claimant is trying to mislead them, she said.
“I think perhaps it’s a case of putting something to the GP [general practitioner] that states, ‘This is the information the claimant has given me, can you confirm it is correct?’, so they’re getting another validation of what was disclosed without pulling the entire medical history, because then it really does look like they’re fishing.”
Impact of uncertainty
The Australian Securities and Investments Commission will probably be given jurisdiction over the handling and settlement of insurance claims and the “opportunity has been lost” for the industry to self-regulate after the belated introduction of the Life Insurance Code of Practice, Baxter said.
With change coming from both the budget and the Hayne inquiry, the risk of new regulations overstepping what is needed is a “definite possibility”, Baxter said.
Insurers dealing with the uncertainty could put forward large premium increases to the funds they work with, and this might lead to funds going through the expensive process of going to tender following on from the implementation of the budget changes to verify whether the new pricing is reasonable.
“We are doing independent reviews for some funds of the pricing that they’re getting to aim to give them some more reassurance that it’s being done on a reasonable basis,” Baxter said.
KPMG states that there may be a 26 per cent hike in premiums for super members with life insurance.