In an era where governments and regulators have signalled zero tolerance for any failings by financial services organisations, how can superannuation set itself up to meet the challenges of the post-Hayne world. Indeed, what will success look like?
In the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, Commissioner Hayne handed down 76 recommendations that both sides of politics said they would support, and no doubt organisations will be moving to implement reforms and tick these off their list. But is there greater value for superannuation to focus on his six principles in terms of creating a stronger and more transparent industry?
The ASFA Spotlight on Insurance unpacked the Royal Commission and looked at the journey on which superannuation needs to embark to ensure the industry delivers for its members.
With an opening address from Deanne Stewart, chief executive of First State Super, and a robust panel discussion also featuring TAL chief risk officer Anne Clarke, and Rice Warner’s executive general manager of insurance Jenni Baxter, the session acknowledged that super and insurance has work to do to meet criticism, regain trust and continue to develop good public policy outcomes.
Delivering on community expectations
Deanne Stewart said the clear message from the Royal Commission is the need for insurance in super to deliver on community expectations.
“As we think of that, and setting the standards or the benchmark for the industry, it’s important to recognise the purpose of superannuation and the role insurance plays inside that, whether in default mode or not.
“If, as a result of the Royal Commission, insurance hawking and commissions get dialled back, there may be quite a role for us to play for insurance inside super that is not default. It certainly warrants thinking about. And we clearly need to reinforce the benefits. This is a critical part of all the debates and discussion of insurance inside super.”
Stewart called out three specific challenges for insurance within super from the Royal Commission. “One is affordability – as an industry we try to pre-empt that and it’s certainly a core element of the insurance in super code. The second is account erosion, which is being tackled by the Code and also what comes out of the Protecting Your Super package.
“So, what are the community expectations here? What are we hearing from the great majority of 21 year olds? How do we make sure we actually stand up for them as opposed to protecting any vested interests.
“And the third is helping members make informed decisions. I’m sure if you stood around a barbecue and you turn to your family and friends and ask: ‘are you exactly aware of what insurance you’ve got inside your super?’ it would be miraculous if they could tell you. But if you followed that up with: ‘can you define when you would or wouldn’t be able to get TPD?’, the conversation wouldn’t go much further.
“So how do we make it simple? How do we make it more standard, possibly, so the average Australian worker can get to grips with what they have inside their superannuation? We have a code in place, which touches on more timely complaints handling as an example, but the Royal Commission is looking to take that further in terms of making it law. It’s great to have a code but if everyone’s breaching it how can it be enforceable and how does it lead to stronger member protections and rights?”
Six key principles to guide behaviour
Given the work the super industry has already commenced to address, affordability and account erosion in particular, Stewart believes Commissioner Hayne’s preamble to the report—featuring six key principles—is of significant value for the industry.
“Does there need to be a whole bunch of laws changed, or powers increased? I would challenge us to think about what his six principles mean for our industry and how we can use them to guide us to a higher order of behaviours, standards and benchmarks that we set,” Stewart said.
She outlined Hayne’s six principles and what they mean in the context of superannuation.
- Obey the law
“This could be taken to mean, which we saw in many cases across financial services, to do the minimum. But actually, obey the law could mean well above that in terms of the integrity and ethics of our industry.”
- Do not mislead or deceive
“Our terms need to keep up with that. Rather than be very technical, we need to look at this through the eyes of our consumers. Again, there’s a higher order principle here.”
- Act fairly
“Financial services needs to act fairly, honestly and efficiently.”
- Provide services that are fit for purpose
“Default insurance inside super – is it fit for the purpose of superannuation? Is it fit for every age group?”
- Deliver services with reasonable care and skill
“Are we making sure we have the highest-qualified people working in underwriting and claims, delivering reasonable care and skill?”
- When acting for another, act in the best interests of that other
“As we’re setting our standards, as we’re setting the next iteration of the Code, do we have this at the heart?”
They [Hayne’s six principles] need to be at the centre of everything you do; take those principles and apply them every day. Then your customers will be at the centre of everything.
– Anne Clarke, TAL
The way forward
Doubling-down on efforts to ensure compliance with the Code is of paramount importance, Stewart believes. “We need to do that as quickly as possible because there’s a huge expectation that we get this right.
“Then, as community expectations become the norm, how might we use a more principle-based approach to better guide our actions?
“The way the Code is written today is quite prescriptive but are we clear about the principles that should be governing insurance inside super? Should we look at this from an industry level rather than a fund level? From First State Super’s perspective, we’re certainly working on it to ensure our members are clear on our principles and that’s what they can judge us by.
“We also need to lead the way in articulating how our contract with members should be enforceable. I’ve been on the other side of the fence and I’ve seen general agreement that it should become enforceable, so let’s lead the debate on that.”
So, where do we start in terms of simplification? Is it the product, the process or the definitions and terms? Stewart said while many consumers are used to instant gratification, an average TPD claim takes anywhere between four and six months. “There’s plenty of room for innovation there. As this relates to letting most members know what they’re entitled to with their insurance inside super, I’d probably start with terms. I think a lot of Australians are very confused about what they’ve got and when they can or can’t claim.
“First State Super has the most amazing member base – teachers, nurses, police officers, firies. We have the carers of society. Success for me would be that those who genuinely claim, are able to do so really easily, really efficiently.
“And for those that actually want a little bit more cover and top up, that there’s a great way for them to do that too. I want all members to be aware they’ve got insurance and actually be happy with it, to look at more, or tell us they don’t need it. Lifting the bar on that awareness and simplicity is key for me.”
Educating your members
Session chair Martin Fahy asked TAL’s Anne Clarke what is standing in the way of achieving what Stewart characterised as success for her fund.
“It’s a challenge we all know very well, to get our members engaged with what they actually have,” Clarke said. “But when Deanne talked about the barbecue conversation, we’re faced with a lot of people having absolutely no idea that they even have insurance in their superannuation. They can’t tell you how much money they have in super and don’t know the benefits provided. They only engage when something happens and need to find out.
“I think we’re in a better place than we were, say, five years ago (in engaging with members) but the challenge remains for members to understand what they have, whether it’s appropriate or if they need to dial it up or down.”
Clarke agrees with Stewart regarding adopting Hayne’s six principles. “They need to be at the centre of everything you do; take those principles and apply them every day. Then your customers will be at the centre of everything.”
The impact cost
In terms of the likely impact on the configuration of insurance inside super in the post-Hayne environment, Jenni Baxter said Rice Warner has been looking at the risk pool and the likely impact on premiums. Will the Hayne report fundamentally change the current offering in terms of price or product features?
“There is a number of changes in the Royal Commission report that will nudge things to be in favour of claimants and possibly absolutely rightly so. These are extremely difficult to estimate. We like to have a bit of data to work from, but we don’t have any on some of these things,” Baxter said.
“One of the other big things that came out is the recommendation that Treasury, in consultation with the industry, explores and determines the practicality and likely pricing impacts of these universal terms, conditions and exclusions.
“To put this into context, we looked at 73 default products, the number of exclusions that are in play and the number of products that use them – and they’re all over the shop. Sixteen percent of those default products don’t use any exclusions at all.
“Then, if we drill down into one of them, even within the exclusions, the wordings are very different and that could potentially mean a very different impact at claims time.
“So we have a lot of variation right now, and if the industry wants to retain some or all of that, it’s going to need to put forward a very carefully considered response, and the message can’t be: ‘the reason we have all this variation is because we just can’t agree.’ We’ve got to actually really think about it, and look at where it’s appropriate to standardise; there are pros and cons of standard definitions for sure.
“The pros are generally trying to make a complex product more simple. If you’ve got a member who’s making multiple claims for default products, and they’ve got different terms, and definitions and exclusions, that must be totally confusing for a member. If we had one set of universal terms, how easy would it be for your claims teams? How much easier would it be to engage with medical practitioners? So it’s a very sensible question to ask.
“On the other hand, the group industry has funds which still have very specific demographics. What may represent material risk for one fund may have an immaterial pricing impact on another. So, if we go to the extreme of standardised definitions, and terms and exclusions, some funds will have premium increases, some funds will have premium decreases.
“At the extreme end we may get into a situation where if we do have a spike in claims, possibly following another economic downturn, the only lever to pull in the short term is price.”