A lot is happening in insurance in superannuation.
In just the past couple of years, trustees have had to implement the Protecting Your Superannuation Package and Putting Members’ Interest First reforms, adjust to the impacts of the COVID-19 pandemic, undertake the first iteration of annual member outcomes assessments overseen by APRA and have also moved towards aligning their practices with the Insurance in Superannuation Voluntary Code of Practice. And more developments are on the horizon, including the design and distribution obligations (DDO) and updated internal dispute resolution requirements.
During this time, ASIC’s work in insurance in superannuation is shining a light on practices that warrant greater attention from trustees. This includes the need for trustees to think carefully about how they can provide affordable default insurance cover that best meets their members’ needs. In a changing environment, it is crucial that insurance arrangements are reviewed regularly to make sure they cater to different cohorts of members fairly and are priced sustainably.
To do this, trustees need to have the right data, as well as the systems and analysis, that enable them to track what is happening to their members. Trustees that use these insights to improve their insurance offerings and processes will be well on their way to meeting their obligations under ASIC’s DDO and APRA’s member outcomes regimes. And trustees should certainly strive towards continuous improvement.
Trustees’ insurance data has also been a focus for APRA. Insurers are finding it challenging to access high quality and timely superannuation fund and membership data, which they need to appropriately design and price their insurance products. APRA is concerned that this may contribute to volatility of premium prices and could adversely impact the sustainability of insurance arrangements.
How trustees are using member data
Value for money
In December 2020, ASIC released Report 675 Default Insurance in Superannuation: Member Value for Money, which explored the metrics that trustees can use to analyse the value for money provided by their default insurance arrangements. Our analysis used data from 11 trustees over the six years to 2018‑19 (covering about 40 per cent of superannuation accounts with insurance at 30 June 2019). We also analysed publicly available data on default insurance offered by 20 large MySuper products, and engaged with trustees to understand their data practices. Key findings from our analysis can be found here.
In terms of data practices, we observed wide variation across trustees. Most found it challenging to provide all the data we requested. Trustees with relatively complicated insurance designs and product structures found it especially difficult, and some trustees even struggled to identify which members were on default insurance settings. This may be due to ineffective administration and record-keeping systems, or limitations in the data-sharing agreements with current and previous insurers.
Some trustees also struggled to explain patterns in the data they provided to us. This suggests that they are not robustly analysing the data they do have – whether to inform decisions about insurance design and pricing, or to prioritise investments in data analysis and systems.
There are several steps trustees can take to better collect and analyse data to monitor and review member outcomes, and to help refine the design and pricing of default insurance. These include:
- segmenting their membership by whether or not members have default cover and by demographic characteristics (such as age, gender, occupation category and work status); and
- monitoring the insurance outcomes for these members (for example, level of premiums, claims ratios, claim incident rates) to understand what outcomes each cohort of their membership is receiving and why these outcomes may differ across cohorts.
Total and permanent disability (TPD) insurance
In October 2019, ASIC released Report 633 Holes in the safety net: a review of TPD insurance claims, which highlighted the widespread problems with the design of TPD insurance – particularly around the ‘Activities of Daily Living’ test. Three out of five claims assessed under this definition were declined, which raises questions about whether consumers can be confident their insurance will help when they need it most. We also saw consumers being confronted with several hurdles in the claims handling process that contributed to one in eight (12 per cent) claims being withdrawn.
Our review found that TPD insurance, including TPD insurance offered through superannuation, was not delivering the best possible outcomes for consumers. In some cases, it led to poor outcomes; for example, for consumers working casually or with mental health claims. Trustees should regularly review the outcomes their members get from group insurance policies, especially where there are restrictive TPD definitions.
Trustees should also work closely with their insurers to improve how their default insurance is designed. We have seen that trustees are often better placed than insurers to collect member data, such as demographics and work characteristics, which is needed to evaluate the effects of eligibility criteria and the impact of restrictive definitions on cohorts.
Trustees are also better placed than insurers to see the full insurance journey of their members: from the time members obtain cover all the way to when members (or their dependants) have their claims processed and paid. Trustees should use data that is in their hands to drive the design of their insurance products and to monitor their members’ claims experiences to ensure that the products they provide continuously meet their members’ needs. They should also proactively address barriers that their members face when making a claim.
Occupational classification practices
In 2020, ASIC reviewed how trustees used default occupational categories in the insurance they offer to their members. We noted that trustees generally had limited information about their members’ occupations, which impacted the design and pricing for different occupational categories. We also found significant variation in the sophistication of trustees’ assumptions and in the factors they took into consideration when designing their default category.
We found that where a high-risk occupational category was the default, the price of insurance was on average double that of the lowest-risk category. In five out of 20 cases, the price difference was between three and four times.
We also found that a number of trustees had poor disclosure practices, including the use of generic labels (such as ‘standard’ or ‘general’) for the highest-risk category. Some did not make the process for members to update their occupational category readily apparent or accessible.
Trustees often have limited data about members’ occupations when designing and pricing their occupational categories, which is usually the reason they rely on default classifications. However, trustees should not rely on intuition alone. We want to see default settings being based on appropriate statistical assumptions, informed by data and analysis. Trustees should make an effort to engage with members and employers to gather better occupation data about individuals and cohorts. This can help them to more appropriately design and price insurance cover that meets their members’ needs.
Trustees should also ensure that they clearly disclose to members which category they are in, what the category means for the insurance premiums and cover, and how members can make changes if necessary.
Another area where we found trustees were relying on inappropriate assumptions about their members was where trustees automatically assigned smoker status to new fund members. Some trustees have remediated these members for additional costs incurred and all have ceased the practice.
In the course of our work, we have observed further opportunities for trustees to better use their data to improve their members’ experiences.
- Trustees need to strengthen their data collection and analysis to support product design that meets member needs with minimal account erosion, and to track their members’ claims and complaints in a way identifies any systemic issues, such as unnecessary frictions in the claims process (see Report 646 Insurance in superannuation: Industry implementation of the Voluntary Code of Practice).
- Where possible, trustees should update their member contact data regularly so they can communicate information to their members effectively using appropriate channels, and in communications include relevant factual information about the member’s current superannuation arrangements to help members (see Report 655 Review of member communications: Protecting Your Superannuation Package (PYSP) reform).
- Trustees should review their processes and take steps to significantly improve the experiences of members who engage with their funds (see Report 673 Consumer engagement in insurance in super).
Insurance in super remains a focus for ASIC
Insurance in superannuation will remain a focus for ASIC. The current period of change presents opportunities to build new systems and processes, and to do things differently. Ultimately, ASIC wants trustees to go beyond good intentions – they should proactively promote the best interests of their members across all aspects of insurance in super. With our expanded role and greater powers to deal with misconduct in superannuation, including in insurance in super, ASIC will continue to monitor trustees’ progress in addressing the issues we have identified.