First and foremost, under the new standard trustees must now have an insurance strategy in place for their fund members.
Trustees must appropriately document their insurance strategy, covering the specified minimum requirements, and maintain records of claims, membership, sum insured and premiums paid for at least five years.
Trustees must document how the insurance covenants have been met, as well as the process for monitoring and renewing the insurance arrangements for each insurer.
The strategy must also cover the claims management policy, where claims handling has been delegated to the trustee, and the approach to conflicts of interests that may arise in relation to insurance.
Insurance and benefit design
Under the APRA standard, benefit design must meet member needs, not just right now but into the future; and trustees must ask themselves whether the design delivers a competitive advantage to their fund.
The fund must also ensure that the best interests of the member are being met when selecting appropriate levels of default cover, ensuring the price is not only competitive, but more importantly, sustainable.
Super fund trustees will also need to document the type and levels of insurance benefits offered.
This includes reasonable conditions for availability of cover and applicable definitions.
Further to this, trustees will need to explain the basis behind their decision, bearing in mind demographics of the fund and availability of opt-out insurance at a reasonable cost, therefore demonstrating that they have analysed member needs, and factors such as demographics, gender and marital status.
Cost is a key factor, and funds must consider how products such as income protection and total and permanent disablement drive cost.
For example, the fund needs to only offer insurance that does not inappropriately erode the member’s retirement benefits.
One view is that insurance shouldn’t be more than one per cent of SG contributions, and the fund must form a view of what is appropriate.
One of the key requirements under the new standard, is that the life insurer chosen must be a registrable superannuation entity (RSE) licensee.
However, one question that remains unanswered within the section on ‘interpretation’, is whether general insurance offerings are excluded from the standard or whether general insurers are excluded from providing insurance cover to trustees.
This is a matter for the regulator and we await their response.
Selecting an insurer
The method of determining an insurer must be documented by the trustee, with a checklist focusing on the provider’s core strengths.
Trustees must document terms of cover and exclusions, claims philosophy, the reasonableness of the premiums to be charged and terms of any delegation of the insurer’s functions.
There must be a due diligence review of the selected insurer, demonstrating the appropriateness of the selection process and due diligence review and how it is applied.
The fund must also show APRA that the engagement of an insurer is conducted at arm’s length and is in the best interests of beneficiaries.
Mid-term reviews of performance of the fund are to be conducted, including any product suggestions, and the insurer is to be benchmarked against market trends.
Trustees will also require regular contact with senior staff of the appointed insurer with a view to identifying, on an ongoing basis, any issues that might materially affect the insurance in place, with such issues being notified to APRA.
Where existing policy arrangements do not meet the standards, trustees will need to take all reasonable steps to renegotiate the terms of the arrangement to minimise any inconsistency.
Reselection or the tender process has not been covered by the standard as yet, and there is some discussion as to whether funds need to go to tender every year as they do in some countries such as the UK, or will it remain every three years as is typical for Australia? Or will funds be able to continue to benchmark themselves?
Overall, the standard clearly sets out APRA’s expectations on trustees when it comes to their insurance offering and trustees will no doubt respond with practices and procedures specifically addressing each of the requirements.
In doing so, there is a real opportunity for insurers to work more closely with trustees and differentiate themselves on the basis of the ongoing service they provide and the experience and expertise they can impart, particularly in determining an insurance strategy.
