ASIC warning on insurance inside super

The Australian Securities and Investments Commission (ASIC) has fired a shot over the bows of superannuation funds over whether they are delivering members value for money through their insurance offerings, particularly income protection.

At the same time ASIC has flagged the issue will be the subject of surveillance next year.

The regulator said that its 2021 ASIC review of the space had again highlighted that trustees needed to examine outcomes for their members and proactively consider whether they are delivering value for money through their insurance in superannuation offering.

ASIC said it reviewed the practices of the trustees of five large funds that provided default income protection (IP) insurance on an opt-out basis to their members and that together, these trustees provided IP insurance to approximately 2 million MySuper member accounts as at June 2021.

IP insurance provides an income for a period of time if an individual can’t work because of illness or injury. Most IP insurance policies contain ‘offset’ clauses, which means the insurance benefit is reduced or ‘offset’ if the individual receives other kinds of income support (e.g. sick leave, workers’ compensation or other insurance benefits).

Commenting on the review findings, ASIC Commissioner Danielle Press said, “We found that the trustees were not proactively giving their members clear explanations about when insurance benefits would or would not be paid as a result of offsets. This information is relevant to members in considering whether they should opt-out of default IP insurance. It is also useful when members are making an insurance claim”.

“Moreover, the offset clauses we saw have raised questions about whether trustees should be doing more to identify if there are groups of members who may be getting low value from default IP insurance.”

“Our concern is not that offset clauses exist. Rather, it is the potential for insurance premiums to unnecessarily erode members’ superannuation balances if offset clauses mean that particular groups of members get very little value from their default insurance if they need to claim,” Press said.

ASIC’s review found:

variation in the types of income that were offset against IP benefits.

The trustees offset different combinations of alternate income, such as paid leave (e.g. annual or long service), employer superannuation contributions, social security benefits, total and permanent disability insurance benefits, workers’ compensation and other settlements.

disclosures about offset clauses were incomplete and difficult to understand.

While most of the trustees described their IP offset clauses in varying levels of detail in insurance guides, they did not explain how the offsets work in their website communications or in their welcome packs to members. Also, the language used to describe IP offset clauses in the insurance guides was often technical and legalistic.

no evidence that the trustees had rigorously analysed how their offset clauses affect member outcomes.

The trustees were unable to demonstrate that they had sought reliable data on offsets and used it to review the appropriateness of their default IP insurance offering.

To address the issues identified in the review, ASIC is recommending that trustees take the following steps:

• obtain and analyse data, including from their insurer, to assess how offsets affect member outcomes, including whether some groups of members are receiving low or no value;
• improve the extent and quality of disclosures to members relating to IP offsets, especially when a member’s IP insurance will pay a reduced benefit; and
• clearly explain to their members how ‘offset’ clauses work, so that members can make informed decisions about their insurance.

ASIC has written to the five trustees outlining specific findings and areas for improvement.

Separately, ASIC sought data directly from three large life insurance companies providing insurance for the trustees in the review. However, the data provided by the insurers was insufficient to determine the proportion of claims with an offset or the types of income that are offset and the impact on insurance benefit payments.

ASIC has written to the insurers asking them to consider what changes need to be made to their systems and practices in order to extract accurate and reliable data on IP offsets going forward.

Press said, ‘I want to remind trustees that the decisions they make about default insurance arrangements are very important because most fund members stay with the default. And it is critical that they collect reliable data to robustly assess the value their members are receiving from any type of default insurance.

“I strongly encourage trustees to consider these findings alongside the issues we previously raised regarding default insurance and take meaningful steps to enhance member outcomes,” Press said.

Next year, ASIC will undertake a surveillance on the progress made by industry more broadly in insurance in superannuation. As part of this work, ASIC will be seeking from life insurers comparable and reliable data relating to IP offsets.