While the call to ban risk commissions inside super is the major insurance topic stemming from the Cooper Review, it is only one of sixteen insurance recommendations made in the Super System Review Final Report.
These recommendations, in Chapter 5 of the Report, cover the need for superannuation members to have adequate default cover and also to be better able to understand and compare their insurance policies.
The Cooper Review Panel considers that life and TPD insurances strongly support the principles of the superannuation system. It says that in the MySuper sector, where members are least likely to give consideration to their insurance needs, the trustee should be required to offer life and TPD insurance on an opt‐out basis.
Recommendation 5.1
Life insurance cover and TPD cover (where available, depending on occupational and demographic factors) must be offered on an opt‐out basis in MySuper products.
The Panel says those MySuper members who do give consideration to their insurance situation should be able to opt‐out or to purchase additional units of cover, if offered by the trustee.
… the retirement benefits of members should not be reduced by unwanted, but compulsory, insurance
But it adds that where members decide to accept the financial risks of death or disability, perhaps because they have no dependants, or would prefer to take out insurance outside their superannuation, then this should be allowed. It says the retirement benefits of members should not be reduced by unwanted, but compulsory, insurance.
Recommendation 5.2
The requirement for a minimum level of life insurance that must be offered by eligible choice funds as set out in Regulation 9A and Schedule 1 to the Superannuation Guarantee (Administration) Regulations 1993 should be repealed.
The Panel says the role of a trustee in selecting an insurer is analogous to the trustee’s role in investing member funds. The Panel therefore believes that all trustees should have a new statutory duty to manage insurance:
Recommendation 5.3
Trustees of MySuper products, and trustees of large APRA funds that offer insurance, should have a statutory duty to manage insurance with the sole aim of benefiting members, including:
- selecting insurance cover with regard to the cost and value for money for members;
- negotiating the terms of the insurance contract, including adequacy of the level of default
cover; and - pursuing claims that the insurer has denied in part or in total where there is a reasonable expectation of success.
The fourth and fifth recommendations are based around the Cooper Review Panel’s belief that trustees should be required to devise and implement an insurance strategy, similar to the requirement for an investment strategy:
Recommendation 5.4
The SIS Act should be amended to require trustees of MySuper products, and large APRA funds that offer insurance, to devise and implement an insurance strategy specifying the types of insurance to be offered and the default and permissible maximum levels of cover to be offered.
Recommendation 5.5
APRA should issue guidance material to trustees to help them in developing an insurance strategy.
Recommendation six relates to the Review Panel’s belief that in the choice sector, trustees should not be required to offer any default insurance:
Recommendation 5.6
In the choice sector, trustees should be allowed to offer life and TPD insurance on an opt‐out or opt‐in basis, or not at all.
Elsewhere in the Report, the Panel says it believes the SMSF sector should have no default insurance levels, but at the sane time, superannuation trustees should be required to consider life and TPD insurance for SMSF members as part of their investment strategy.
Recommendation seven seeks to extend the time (currently two years) in which a member can challenge a TPD claim after it has been denied:
Recommendation 5.7
The Superannuation (Resolution of Complaints) Act 1993 should be amended to allow the Superannuation Complaints Tribunal to consider complaints in respect of TPD claims when the claim has been lodged with the trustee within six years of the member ceasing employment and the complaint has been made to the SCT within two years of the trustee’s decision.
Confusion over different definitions of TPD, especially when a member is changing funds, has motivated the Panel to call for a ruling that will deem the definition of TPD in the current trust deed to correspond with the definition of TPD in an external insurer’s definition:
Recommendation 5.8
The SIS Act should be amended so that the trust deed of a large APRA fund is deemed to define total and permanent disablement in the same way as the insurance policy held by the trustee at the relevant time.
‘… administrative and cost hurdles may prevent certain funds from offering income protection insurance as a default’
Recommendation nine looks at income protection, with submissions leading the Panel to note that ‘…administrative and cost hurdles may prevent certain funds from offering income protection insurance as a default.’ Because of this, the Panel has recommended more flexibility on offering income protection within super compared with Recommendation 1,which covers death and TPD cover:
Recommendation 5.9
Income protection may be offered on an opt‐out or opt‐in basis, or not at all by trustees of MySuper or choice funds.
Recommendation ten stipulates clearly the panel’s view that no other types of insurance should be offered under super:
Recommendation 5.10
Apart from life, TPD and income protection insurance, no other type of insurance (for example trauma insurance) should be permitted to be paid for by members through their superannuation and any existing policies outside those categories should be phased out.
Recommendation 5.11 addresses the Panel’s view that greater transparency should be provided and more information given to members about their insurance cover and claims history:
Recommendation 5.11
Trustees of large APRA funds should be required to publish on their websites the terms and conditions applicable to each type of insurance offered by the fund, along with other information relevant to members, including:
- a plain English explanation of the policy terms;
- premium tables showing the gross premium charged for each category of member (if relevant) at each $1,000 of cover at current age with a standard frequency of payment. Any additional cost associated with the insurance should be noted as part of this disclosure; and
- TPD claim success rate on a basis to be determined after consultation with the industry.
The issue of banning risk commissions in super is covered in a separate article (Risk Commissions in Super to be Banned – Cooper):
Recommendation 5.12
Up‐front and trailing commissions and similar payments should be prohibited in respect of any insurance offered to any superannuation entity, including to SMSFs, regardless of rules on commissions that might apply outside superannuation.
The Review Panel believes intra-fund advice should be tailored to meet changing insurance needs of its members. The implication here is that the super funds should be in a position to adequately offer insurance advice to members at different stages of the work and life cycle, rather than having a member need to consult with an external adviser:
Recommendation 5.13
MySuper trustees should pro‐actively offer intra‐fund advice to members in relation to theirninsurance in MySuper.
The next two recommendations reflect concerns the Panel has in relation to an individual member’s changed circumstances after having made a binding death benefit nomination, such as becoming divorced:
Recommendation 5.14
The SIS Act should be amended so that binding death nominations would be invalidated when certain ‘life events’ occur in respect of the member. The current systems used by States and Territories under which testamentary dispositions are invalidated could be used as guidance for creating a single national model.
The Panel says that if the change in recommendation 5.14 is made …
Recommendation 5.15
Subject to recommendation 5.14 being implemented, the SIS Act should be amended so that binding death benefit nominations only have to be reconfirmed every five years.
The final recommendation made by the Cooper Review Panel seeks to close a self-insurance loophole currently used by a number of large APRA funds due to concerns around sufficient reserves capital and the capacity to pay:
Recommendation 5.16
After a suitable transition period, self‐insurance of any fund benefits, including death and TPD benefits, should not be permitted in any large APRA fund except defined benefit funds (or sub‐plans) that are currently allowed to self‐insure.
Note that all the above are recommendations only, and we will monitor the final response from Financial Services Minister, Chris Bowen and the Government, as to which of these recommendations it will ultimately adopt.
Click here to access the Super System Review Final Report Chapter 5 – Insurance in Superannuation.
The are much wider implications here. This is ensuring the “Nanny State”. There will be now no incentive for adviser to ensure client have adequate insurace (life and TPD) There will be noincentive to take the time and effort to properly present the real and disturbing case as to WHY clients should have adequate cover. Self employed adviser may as well go and get a job with MySuper. At least that way we can get paid to give them good advise, and make sure they have adequate cover.
These recommendations are disappointing in that they indicate a prevailing attitude that advice given in exchange for commission is intrinsically inferior to that provided by a paid employee or family member at a barbecue.
Any evidence that the system overseen by ASIC and enforced by licensees for ten years to ensure that insurance advice is in the best interest of the client is ignored.
Why let the facts get in the way of a good political witch hunt against an unpopular target with limited political influence.
If this attitude is carried over into the 2011 Treasury Future of Financial Advice investigation of commissions in insurance advisers who are not paid a salary by a major corporate will be forced out of business.
The end game will be a back to the future scenario with tied agents of banks and super vendors promoting insurance from their employer just like we had pre 2001.
(Cooper Page 147 – Offsets in many TPD policies reduce the benefit paid to a claimant depending on other payments that they are eligible for — such as workers’ or accident compensation, sick leave or Centrelink benefits.)
TPD offsets? I question the “Panel’s” education level regarding TPD. In all the TPD claims that I have had, I have never seen offsets against TPD Lump sum
The “Panel” contradicts itself. On one hand it seeing there is an underinsurance problem and on the other takes away the most cost effective way for people to get advice on insurance and has inadvertently increased the cost of insurance via super.
(Cooper Page 152 -153-There is widespread agreement that Australians generally are under insured. It has been commented that insurance is generally sold, rather than bought, and that widespread underinsurance means that measures to restrict incentives for the sale of life insurance should therefore be considered with caution. In the Future of Financial Advice reforms, the Government indicated that it would consult further about whether to extend the ban on commissions to risk insurance (including group risk insurance). This was because insurance has different features from investment products, including the fact that, unlike superannuation, there are no investment funds which might be used to pay for advice. Therefore, concerns about affordability and the potential for underinsurance needed to be explored in this context.The Panel believes that insurance commissions should be prohibited in respect of all superannuation products regardless of whether the insurance cover is a default cover or not. The Panel is also concerned that allowing commission based payments for insurance would mean that financial planners could still be conflicted in giving their superannuation advice.)
Keep in mind that in the media today MP Chris Bowen is trying to rush these changes through Parliament. I suggest it is because he wants it final before the industry can collect itself to challenge the “Panels” recommendations. Very similar to the mining tax except our industry does not have the same funding.
If you read 8.1 page152/153 and 10 page155 there is a contradictary and disturbing analogy that points to a zeolot with a burning desire to achieve his or her goals while ignoring the blindingly obvious to anyone who actually works in the Insurance advisory industry.
Repeating verbatim from 8.1>Superannuation provides an ideal distribution mechanism for insurance.In this context,an adviser can help members in the composition and level of cover that they should have,but if the member receives no advice,they are still likely to be insured through default opt out coverage.
The first part was right, the second part,
completely wrong.
Insurance default funds have never been sufficient in quantity and quality of cover provided.The reason why Insurance definitions and benefits have improved is because of healthy competition and freedom of choice for Independent advisors to place clients in the best policy that suits their clients circumstances.
The very fact that 3 billion eight hundred million dollars was paid in claims,was due to the fact that advisers have created the revenues and prudential reserves over many years to enable these people (and claims are not figures,they are real people caught out and in the most vulnerable position they will ever be in)to be paid, which in turn would mean a multi billion dollar burdon on the Tax payer if there were no advisers to help generate these revenues,let alone help and guide devastated people at their time of need.
I had a good friend of mine cancel his personal insurances because his Industry Super fund through work was the bee’s knee’s, he was assured from the experts at work.
Less than 6 months later he was diagnosed with cancer and being the fighter he was,he took 2 years to die.The Industry fund was not interested,they passed the buck to the Insurance carrier,who passed the buck to the fund administrator and the Australian employer who was equally uninterested, who happens to generate multi billions in revenues,but hey he was one of thousands of managers and they can easily be replaced,though they did kindly keep his job open on nil salary right up to the day he died.
I approached my friends multi billion dollar employer and Industry fund who also is one of the biggest Australian funds, to see if they could help him, considering it was their stuffup and beaurocratic paper shuffling that led to my friend being without cover.
Did they help their long serving loyal employee? No,they let him die destitute with a widow and children completely, financially destroyed.
I have a 100% success rate with claims over the 23 years i have been a insurance adviser,yet i failed in my fist attempt to get a Industry fund to face up to their responsibilities,WHY? Because they did not have to listen to me as i was not his adviser and could not represent him,CASE CLOSED.
Without advisers to take on the Insurance Companies,clients are in a void that they cannot cope with and they feel helpless.
This Government review are telling all and sundry that commissions are a evil expense that once abolished,will solve the inherent problems around cost.
The real cost is telling a child that his or her poverty is a necessary part of life,but be happy that daddy saved a few dollars on insurance premiums so his minimal superannuation balance was a bit higher,even though his family is now destitute.
Let me finish with 10>page155 Self Insurance
The author of this report very wisely warns of the dangers of self insurance and points to the prudential safeguards Life insurers operate in.IE:RESERVES,the very billions of dollars myself and thousands of hard working advisers have helped generate and to which these learned experts who have never sold a policy or been in front of a client,are now recommending kill off the very thing that built the Insurance Industry to be the multi billion dollar protection industry it is today.
I for one am not impressed though I suppose it is standard that I am writing this at 11.20pm at night,while the salaried employed beaurocrat wanting to bankrupt me and thousands of advisers,their families and their employee’s families,is tucked up in bed dreaming of great things he will achieve tomorrow.
The Trustees of these MySuper accounts now have to give advice on insurance. Who pays for this advice? The client, and where does this cost come from,their account balance! How many advisers will these funds have to employ,thousands!
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