In some ways, the operational risk of a fund’s insurance rests as heavily on the shoulders of the trustee as on those of the insurer. A member’s claim for several hundred thousand dollars of cover, unsupported by a fund’s insurance policy, can cause consternation for trustees and have an impact on the fund’s profitability. Other issues include the cost of multiple ‘fixes’ of insurance cover that has been incorrectly applied along the way.
Operational risk is fast becoming a catchphrase in superannuation, and the operational risk attached to insurance within superannuation has had an increased airing of late. Increased awareness of the operational risk of insurance within superannuation can only be applauded. Its consideration, however, is tending to be limited to the risk carried by the insurers, as opposed to the trustees. There is little doubt the much talked about capital requirements of group insurers has a lot to do with this.
The risk carried by insurers, in a burgeoning superannuation market is considerable and appropriate pricing is vital to the sustainability of the insurance now being offered by superannuation funds. Group insurance actuaries utilise all the data available to them in determining their pricing. Their considerations include the size and history of the fund, member demographics, the fund’s claims experience and the previous and proposed insurance benefit design. Underpinning these considerations is the ongoing pressure to win business.
The usual outcome of a successful response to a group insurance tender is a group life policy and a group income protection policy reflecting the terms and rates agreed by the insurer. A reinsurance treaty commonly backs these policies, whereby a reinsurer has agreed to carry what is often a significant portion of the attached risk.
Sensible pricing, backed by a safeguard level of capital goes partway to addressing the operational risk of insurance. However, the actual execution of the insurance offer remains the responsibility of the superannuation fund trustee, albeit they traditionally outsource this function to an administrator. In reality, insurers are a long way from the action when it comes to a superannuation fund’s administration and reinsurers are even further away. Aside from underwriting and claims assessment, insurers have little if any involvement with the execution of the terms of the insurance policy they have committed to. They are even coming under pressure to relinquish more and more of the underwriting and claims assessment processes to funds’ administrators.
Most superannuation fund administrators are quick to acknowledge that the most problematic aspect of any superannuation fund to administer is the insurance. And it hasn’t been getting any easier as more funds look to insurance as a differentiator. After a long period of very little other than basic units of cover being provided to employed members, we now see sophisticated offerings within funds, with automatic cover continuing to be provided to a member so long as they have sufficient money in their account to fund the premiums. Meanwhile, administrators can be playing catch up. Particularly so, if the required system development for complex insurance arrangements is competing with changes necessary to accommodate upcoming regulatory changes.
The less aired insurance operational risk associated with its administration is now coming to the fore, as increased complexity takes hold and sums insured increase. Trustees need to be aware of this area of operational risk. Increased scrutiny from insurers and reinsurers is likely, particularly if they start seeing a succession of large questionable claims coming through. Also, the high cost of rectification of day to day insurance administration issues has the very real potential of eroding a fund’s bottom line.
