Treasury has proposed to prohibit super funds from offering any insurance products that do not fit the Superannuation Industry (Supervision) (SIS) Act definition of permanent incapacity.
This means the existing arrangements for own-occupation benefits will be phased out, although the length of the transition period has not yet been stated.
The proposals are still open for consultation.
"Currently, some members are being charged premiums for various types of insurance that may not be released to them when an insurance payment is made for them, because the circumstances do not meet a condition of release," Treasury said in its explanatory memorandum to the third tranche of the MySuper legislation.
"The government . believes that it is in the best interest of members to align the insurance definitions with the conditions of release so that insurance is consistent with the purpose of superannuation and that monies are available to members when the insurer makes a payment to the fund under the relevant insurance policy," Treasury said in the Superannuation Legislation Amendment (Further MySuper and Transparency Measures) Bill 2012.
Treasury has flagged it will implement two operational standards, which will relate to the kinds of benefits that cannot be provided by taking out insurance through a super fund.
"This ensures members are able to have the proceeds of insurance policies released to them at the time a risk that they are insured for occurs," the document said.
The changes were likely to have a significant impact on insurance contracts within the superannuation industry, especially own-occupation insurance cover, Holding Redlich partner Jenny Willcocks said.
"This is likely to present some difficulty for trustees currently offering this cover and will impact on group insurers as well," Willcocks told Investor Weekly.
"Own-occupation cover comes with a higher premium, so if these people are moved to an any-occupation cover, which is harder to satisfy, premiums will be less.
"It will mean renegotiating group insurance policies."
It could also potentially mean super funds will have to transition members out of own-occupation cover into cover based on the permanent incapacity definition in the SIS Act, even without their consent.
In that case, funds will have to issue significant event notices and make changes to product disclosure statements and other insurance material.
The Association of Superannuation Funds of Australia (ASFA) does not plan to oppose the draft legislation, but will focus on whether existing insurance arrangements can be grandfathered.
ASFA will also look at how members can be transitioned out of the existing arrangements into total and permanent disability products that are based on any-occupation cover.
Treasury's proposed changes to the legislation could result in higher premiums for all members.
"Depending on the number of members involved and what grandfathering arrangements, if any, will be granted, there is potential for this to mean higher premiums for all members when the group insurer sees a reduction of its profits as a consequence of the change," Willcocks said.
The problem of the discrepancies in definitions within the act were initially thought to be largely theoretical, because often when someone is disabled for their own occupation, they are also disabled for any occupation, which means the benefit can be paid out.
However, recently a case has come up in which the member could not exercise his own profession, but was able to do other jobs and was, therefore, unable to access the claim money paid out by the insurance company.
It is unknown how widespread the problem is.
