Recent prudential reforms for superannuation trustees include significantly enhanced responsibilities relating to the management of the life insurance benefits provided to members. This comes at a time of considerable profit pressure within the life insurance industry, pushing premiums up and putting pressure on benefits. In this environment, what can superannuation trustees do to maximise the value of insurance for their members?
The life insurance industry is now enduring a perfect storm. After many years of intense competition in the group insurance market, and high acquisition costs in the retail market, the pressures of increasing claims and higher lapse rates are taking their toll on profits.
In light of this, superannuation trustees need to take a more active role in assessing their existing insurance cover against their members’ needs to ensure it is still delivering the right balance of benefits versus cost. A clear understanding of insurance market conditions, and a focus on process and data quality, will help trustees create an attractive value proposition for their members.
Recent APRA statistics show that, over the past 12 months, the Australian life insurance industry recorded a loss of over $100 million on group insurance policies (death, TPD and disability). Reinsurers have also been heavily impacted in Australia, with reserve increases significant enough to be the headline item in global profit announcements. Long delays in group insurance claim reporting, mental health claims and disability products have all been cited as problem areas, with reinsurers becoming increasingly cautious in the group life market.
In the short term, superannuation members have been getting a great deal – the insurance premiums paid by members are less than the cost of providing insurance. But this is clearly not sustainable, and many superannuation funds are finding their insurance premiums rising significantly.
At the same time, APRA has introduced new responsibilities for superannuation trustees in the form of Superannuation Prudential Standard 250 – Insurance in Superannuation (SPS 250). Among other things, the new standard requires trustees to maintain insurance data for a minimum five year period – a measure directly aimed at helping insurers to price more accurately and therefore driving a more sustainable industry.
Data quality is a constant challenge for group life insurers. Often, insurers deal with complications from missing data fields, poor records of benefit changes over time, incomplete or unreconciled premiums, and uncertain run-off periods for claims. In the current profit-strapped environment, such data failings will increasingly be met with price hikes to cover the risks associated with incorrect or incomplete information.
Improving data quality is not just an issue for insurers. The new SPS 250 rules clearly outline that superannuation trustees have ultimate responsible for maintaining data quality, and this goes beyond simply requiring a third-party insurer or administrator to hold accurate information. APRA expects trustees to:
- conduct testing of premium calculation, underwriting, and claims management processes
- hold more than five years of data if the typical claims run-off is over a longer period
- maintain a history of insurance benefit design
- have established processes for accessing data when required, if their records are held by a third party
For superannuation funds, these new obligations should not be viewed as just another compliance burden. They will not only improve insurance data quality but ultimately drive fairer insurance pricing that is better aligned to fund members.
So what should a prudent trustee be doing to make sure they not only meet the requirements of SPS 250, but also gain improved outcomes when it’s time to reprice insurance premiums?
- Have a clear strategy for insurance data records. If retaining data internally, establish clear extract processes that allow that data to be easily collated and provided to insurance companies for pricing purposes. If relying on an administrator or insurer for the data, define the data extracts now and periodically request them to ensure that they are readily accessible. Also consider how you will access data if your insurer or administrator changes.
- Understand the performance of insurance portfolios. Regular analysis of insurance profitability will assist in understanding any potential impacts on insurance premiums when it comes time to re-rate portfolios. It may also help to refine the insurance offering to members, if particular types of cover are too costly for a fund’s membership profile. If profitability varies significantly in different segments of the fund’s membership, perhaps separate divisions for insurance would better align insurance costs with the member risk profiles.
- Review insurance benefits to ensure relevance to fund members. For many years, life insurance has experienced ‘feature creep’, as small additional benefits were added into policies in an effort to gain an edge over other products on the market. Automatic acceptance limits for insurance have also been increasingly steadily. While the cost of each marginal change may be small, ultimately they add up, putting additional pressure on claims and premiums. By revisiting the benefit design of existing insurance coverage, and removing any features of limited value to members, trustees may be able to better align cover to their members’ needs while also reducing pressure on premiums.
- Clean insurance data periodically. Establish regular processes to review insurance data for completeness and, where gaps are identified, make required corrections to member or claims records. Such issues are easier to correct when identified close to the time of claim, through the implementation of regular and structured data monitoring. The improved data quality should also have the added benefit of increasing the confidence of group insurers.
- Test insurance processes regularly. Periodically test insurance premium calculations against administration systems, application of underwriting rules by administrators, and alignment of claims management processes to product design. Process errors that go unidentified for long periods are very expensive to investigate and rectify – identifying issues early, can significantly reduce the cost to members.
By focusing on these five key areas, trustees have an opportunity to go beyond mere compliance and derive real organisational and member value from APRA’s increased insurance obligations. At a time when premiums are rising, minimising insurance costs while maximising relevant benefits should be a priority for all superannuation funds.
Stuart Turner is a partner of Ernst & Young Australia, specialising in wealth management and life insurance. Maree Pallisco is the national superannuation leader for Ernst & Young Australia.
The views expressed in this article are the views of the authors, not Ernst & Young. The article provides general information, does not constitute advice and should not be relied on as such. Professional advice should be sought prior to any action being taken in reliance on any of the information. Liability limited by a scheme approved under Professional Standards Legislation.