Super Fund Code to Cap Premium Prices

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Super funds offering life insurance will be required to stop deducting premiums after a member’s contributions cease, and cap premiums in line with the earnings of members, according to a new draft Code of Practice.

ISWG Chair, Jim Minto
ISWG Chair, Jim Minto

The draft Code, released by the Insurance in Superannuation Working Group (ISWG), will also require super funds to ask new members for permission to search for other insurance cover held within superannuation.

Other key measures in the draft Code would require that insurance offered on an automatic basis was appropriate and affordable for members, and did not inappropriately erode retirement income, and the adoption of prescribed timeframes for the assessment and payment of claims.

In regards to premium limits, a consultation paper on the Code released by the ISWG stated “…the Code includes a maximum premium limit that trustees must use when designing benefits for automatic cover, which is 1% of ordinary time earnings for relevant segments of the membership, and the membership generally”.

“…the draft Code ‘…will extend on the current FSC Life Insurance Code of Practice by setting standards that ensure a common end to end experience’…”

This, however, may impact current levels of cover with the paper also stating “…the ISWG notes that in order to achieve the premium limits noted above, there may need to be a reduction of cover for some segments of members in order to reduce their premiums”.

Insurance deductions would end 13 months after a member’s contributions cease, according to the draft Code, but funds would be required to have notified a member on multiple occasions before cessation could occur.

The paper also states the draft Code “…will extend on the current FSC Life Insurance Code of Practice (FSC Insurer Code) by setting standards that ensure a common end to end experience for all classes of life insurance consumers”.

Both Codes will carry enforceable arrangements to ensure compliance but the ISWG has stated that it would also seek ASIC authorisation for this first iteration of its Code, unlike the FSC which has opted to seek authorisation for later iterations of its own Code, which came into effect earlier this year.

ISWG Chair, Jim Minto said the draft Code was a recognition of the need for super funds and life insurers to improve the interaction of fund members with life insurance.

“After 25 years of compulsory super, there was a need to examine the insurance offerings inside super to ensure they were still appropriate and affordable for all members,” Minto said.

“Importantly, the draft Code includes measures to address the impact of insurance on retirement incomes and, in particular, the impact on low income earners, young people, those with less secure employment and women,” he added.

The Code will apply to all APRA-regulated super funds that offer insurance from 1 July 2018, with a transition period of 12 months and is currently open to industry consultation until 20 October 2017.