An ASIC review of default occupational categories in life insurance held through superannuation has identified ways for trustees to improve member outcomes and better meet legal obligations.
ASIC reviewed the ‘occupational default’ practices of a sample of 21 trustees who were using a high-risk occupational category as the default in their MySuper products. This review was part of ASIC’s ongoing work on insurance in superannuation.
Trustees often have limited data about members’ occupations. As a result, mostsuperannuation trustees allocate their MySuper product members a particular occupational category for the purpose of life insurance cover (occupational default) unless the member or employer provides additional information about the member’s occupation.
What occupational category is chosen as default is important because a high proportion of members generally end up in the default category. Funds often select the highest risk category as their default to ensure all members are covered regardless of their occupation. However, this means the premiums are comparatively high.
In the products ASIC looked at, on average the price of default insurance for the highest risk occupational category was approximately double that of the lowest risk category. In five out of 20 cases, the price difference was between three and four times.
ASIC Commissioner Danielle Press said, ‘Superannuation trustees should take a considered approach to designing their default insurance cover. While a high-risk occupational default may be appropriate in some circumstances, trustees need to be able to justify their default settings based on their membership base.’
ASIC’s review
ASIC undertook the review in 2019 and 2020, choosing trustees that used a high-risk occupational default and that were more likely to have a membership with white collar or broad-based mix of occupations. The review explored a range of issues such as the assumptions trustees made about their members when setting their fund’s occupational default, the factors trustees considered, and how they determined that the default was appropriate for their membership.
Trustees were also asked what they told members about the occupational categories, particularly the default, and how easy it was for members to update their occupational category to ensure that they are paying the correct insurance premiums.
Key findings
ASIC’s review found:
- significant variation in the sophistication of trustees’ assumptions and in the factors they took into consideration when designing their default category;
- poor disclosure by some funds, including about the relative cost of premiums in different categories and, in the case of 15 trustees, the use of a generic labels (such as ‘standard’ or ‘general’) for the most expensive category; and
- the process for members to update their occupational category was generally not readily apparent or accessible.
Following ASIC’s engagement, most trustees using a generic label for their occupational default have updated their product disclosure statements (PDSs) and/or website disclosures to include clearer information about their occupational default categories.
Areas for improvement
Trustees may be contravening their legal obligations if they fail to ensure that insurance premiums charged to members are based on appropriate statistical assumptions. They can enhance outcomes for members with default insurance by ensuring that:
- effort is made, through engagement with members and employers, to gather better occupation data about individuals and cohorts so that default settings are based on appropriate statistical assumptions and are fair and reasonable;
- occupational default labels are meaningful, promote understanding of the level of risk and associated cost of the category, and trustees take prompt action to address any mis-categorisation;
- disclosures clearly state:
- a member’s occupational category,
- the meaning of the category,
- the cost of the insurance in that category, and
- whether the member may be eligible for an alternative category that is less expensive or provides a greater level of cover;
- members can easily amend their profile so that premiums are charged based on accurate information.
Ms Press said, ‘Our review found that the design and disclosure of occupational defaults are two areas where trustees can do more to improve member outcomes. They can do more by gathering better occupational data about fund members and by providing better disclosure to their members.
‘Better occupation data about members will assist trustees in designing fair and reasonable default insurance, and good, clear disclosure can empower their members to make better informed decisions about their insurance arrangements,’ she said.
Background
In Report 591 Insurance in superannuation, ASIC raised concerns about the practice of trustees defaulting their fund members into high-risk occupational categories in the absence of member data.
Most super funds group occupations into categories such as ‘Blue Collar’, ‘White Collar’ and ‘Professional’ to reflect the different levels of risk and the cost of cover associated with different occupations.
ABS data suggests that 50% or more[1] of the Australian workforce is employed in primarily administrative or office-based work (i.e. lower risk, white collar work). In those funds not targeted to high-risk occupations, it is plausible that many members may be paying too much for their insurance if substantially more than 50% of the membership is in the high-risk occupational category by default.
The industry has recognised that this issue needs to be addressed. The Insurance in Superannuation Voluntary Code of Practice requires that trustees must not include members in higher risk categories than the general membership due to occupation without relevant evidence. In line with Recommendation 4.15 from the Financial Services Royal Commission, APRA is updating SPS 250 to strengthen trustees’ obligation to ensure that ‘any status attributed to default members (affecting the premium to be charged for insurance) is fair and reasonable’.
ASIC has been working on a number of initiatives to improve trustee practices around default insurance in superannuation (refer 19-352MR, 20-180MR) and will soon communicate about measuring the value for money delivered to members.
[1] ABS 6291.0.55.003 Labour Force, Australia, Detailed, Quarterly (Table 7)
