Facing the challenges of insurance in superannuation

A consistent theme in the articles we have written for The Wrap over recent years has been the emerging issues and challenges faced by both insurers and superannuation trustees in offering insurance benefits to members through their superannuation funds.

Since 2013, the Stronger Super reforms have clarified the types of insurance that may be provided by superannuation trustees to members, the levels of default insurance to be made available via MySuper products and established the prudential oversight of arrangements between superannuation trustees and insurers via APRA’s Prudential Standard SPS 250 - Insurance in Superannuation (SPS 250).

In this article, we review APRA’s most recent publication: APRA Insight Issue 1, 2015 and the findings of the Insurance in Superannuation Thematic Review.

APRA’s thematic review 2014

In 2014, APRA undertook a thematic review to determine how well the superannuation industry was implementing the requirements of SPS 250 and complying with the insurance covenants in section 52 of the Superannuation Industry (Supervision) Act 1993 (SIS Act).

The review involved 33 RSE licensees from a cross-section of the superannuation industry and led APRA to make a number of observations across a range of topics.

In general, APRA noted that overall the superannuation industry had made substantial progress in addressing the new prudential requirements and improving the sustainability of insurance arrangements but more work is required by many.

The group insurance market has experienced turbulence in recent times with significant increases in premiums being felt by superannuation funds.

As a result, many funds are now taking steps to tighten up benefit designs to help ensure that insurance benefits to members are sustainable and do not result in the overall erosion of retirement benefits for members.

Insurance governance 

The introduction of SPS250 highlighted the responsibility of the board of a superannuation trustee for the provision of insured benefits to members and for the fund’s insurance management framework or IMF.

While many superannuation trustee boards delegate some of their authority for the IMF to specific sub-committees or management, APRA highlighted the importance of those boards ensuring proper governance arrangements are in place so that the board can properly undertake its responsibilities for insurance arrangements.

The message from APRA’s review is that there must be clear delegations in place and for those boards to receive regular and holistic reporting on insurance arrangements and experience.

While board and sub-committee oversight has been significantly improved in relation to insurance tender and renewal activity, APRA considers that more can be done to enhance a board’s understanding of the ongoing insurance operations and IMF.

APRA made special mention of related party arrangements and the importance of ensuring that the insurance arrangements are conducted on an arm’s length basis and in the best interests of members. APRA particularly liked the practice of the engagement of an independent adviser to benchmark the insurance arrangements on at least a triennial basis.

The IMF

APRA has emphasised the importance of a robust IMF that encompasses all aspects of insurance-related business operations - its systems, structures, policies and processes.

APRA considered that many trustees’ IMFs were still largely compliance focused and identified this as a weakness. It would like to see trustees embed the IMF within their business operations with a focus on improving the overall operation and documentation of the IMF.

Additionally, APRA has emphasised the importance of ensuring that the linkages between an IMF and a trustee’s risk management framework (RMF) are strong, and the approach taken in each framework is consistent, so that the risks associated with the insurance benefits provided by the fund are also adequately captured in the RMF.

Insurance benefit design

APRA observed that a number of funds are making changes to their insurance benefit designs in response to significant premium hikes and adverse claims experiences. These benefit design changes have been varied and often apply only to new members joining the fund.

Trustees can improve the quality of their analysis and the documentation of the process they have followed to support their decision making on why the insurance benefit design changes are in members’ best interests.

APRA also observed that improvements could be made to the quality and depth of the analysis of membership demographics and behaviours when considering the changes to benefit design to ensure that the changes being proposed are appropriate and relevant to the fund’s membership.

There is a risk that trustees and insurers may simply follow the market in their benefit design changes. However, APRA has highlighted the importance of ensuring, and having the evidence to demonstrate, that proper consideration has been made of the impact of those changes on the particular fund membership demographics.

APRA has also highlighted the important role an administrator plays in any such analysis and also in ensuring any such benefit design changes can be properly administered.

Selection of insurers and the tender process

APRA has acknowledged that trustees are applying a more holistic approach to their tender selection process and looking at a variety of factors in weighing up their decision process and due diligence of insurers.

APRA noted that IMFs could be improved by the development, and better documentation, of benchmarks for the selection of insurers, and the further detailing of the process for insurer selection and the due diligence process involved.

Trustees are also encouraged to become less reliant on insurers for the development of a claims management philosophy and should define their own philosophy for claims management.

APRA also recommends that trustees give insurers and reinsurers adequate advance notice of any planned tender or renewal process to ensure that they are well positioned to be able to obtain competitive bids.

APRA has cautioned trustees, especially smaller RSE licensees, not to be too reliant on third party advisers for conducting all aspects of the tender and due diligence process for the selection of an insurer. Trustees should similarly use robust selection and due diligence criteria in their choice of third party advisers as well.

Other Themes

Other themes on which APRA commented included:

  • Unacceptable industry practice in delays in the execution of key contractual arrangements, agreements and policies resulting in the insurer often being on risk before such documents have been executed. APRA considers that long delays are an unacceptable practice and heighten legal and operational risks.
  • It is important that trustees have a good understanding of the overall insurance pricing arrangements, including the operation of any rate guarantee period.
  • Data management and integrity are still viewed as being a weak area for trustees with many taking a compliance view and meeting the minimum requirements under SPS 250. APRA highlighted the importance of trustees maintaining data over longer periods of time particularly in light of the more recent extended claims patterns.
  • The value and importance of regular data verification and cleansing was highlighted, as was the value in engaging actively with insurers and administrators on future insurance data needs and the significance of this data for future benefit design changes, re-rates and management of member services.
  • APRA also commented on the importance of trustees continuing to develop an understanding of insurance underwriting processes to ensure that these align with the agreed insurance arrangements and are being properly administered. Similarly, APRA highlighted the importance of trustees being aware of, and fulfilling, their responsibilities in relation to claims management processes and ensuring that their IMF properly documents these arrangements.

The APRA Insight provides rich and helpful commentary for trustees, administrators and insurers to consider when having regard to their own processes and fund.