Super trustees not proactive with insurance explanations

The Australian Securities and Investments Commission (ASIC) is cautioning superannuation trustees to proactively consider whether income protection (IP) insurance offerings are delivering value for members or unnecessarily eroding members’ balances.

The corporate regulator reviewed five of the largest super funds which provided default IP insurance on an opt-out basis to approximately two million members.

The key area of concern for ASIC was that most IP insurance policies contained ‘offset’ clauses which meant the benefit was reduced if the individual received other kinds of income support, including sick leave or workers’ compensation.

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ASIC commissioner, Danielle Press, said the regulator was not concerned that offset clauses existed, rather that there was room for better communication with members as it had the potential to unnecessarily erode the super balances of members receiving other kinds of income support.

 “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,” Press said.

“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.”

ASIC also said it would undertake surveillance next year on the progress made by industry more broadly in insurance in superannuation.

ASIC’s review found:

  • 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; and
  • 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 had written to the insurers asking them to consider what changes needed to be made to their systems and practices in order to extract accurate and reliable data on IP offsets going forward.

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