Sustainability of life insurance in superannuation - December 2023

To: All RSE licensees and group life insurance chief executive officers 

Insurance in superannuation plays a critical role through the provision of default life insurance benefits to millions of Australians who may otherwise have no other protection. The sustainability of these benefits is vital if they are to continue to support superannuation members through some of the most challenging times of their lives.   
  
At the end of 2022, APRA conducted a survey of a sample of RSE licensees, life insurers and reinsurers to assess how the industries are responding to the issue of sustainability of group life insurance in superannuation. APRA selected entities to participate based on entity size as well as recent tender activity. APRA thanks all entities who participated in this survey.   
  
The survey was generated to allow APRA to understand the actions taken in response to APRA’s letter to the life and superannuation industries dated 9 March 2021.¹ The letter stated that APRA expects that life insurers and RSE licensees will take steps to ensure that group insurance offerings and benefits are sustainably designed and priced, provide outcomes that are of value to members, and adequately reflect the underlying risk and expected experience. Three specific areas of concern were identified in the letter being premium volatility, availability and provision of data, and tender practices.   
  
The findings of the survey indicated the following: 

Premium Volatility 

The responses to the survey identified that premium volatility is still evident. Recent legislative changes impacting participation in group insurance arrangements and uncertainty arising from the recent pandemic have contributed to this volatility. This volatility is expected to abate significantly from this point on and APRA will continue to monitor this through normal supervision processes.  
  
Better practice examples noted included:  
  
Premium stability:

• RSE licensees reviewing premiums offered by the insurer to ensure, as far as possible, that post the initial rate guarantee period premiums do not markedly increase in the absence of adverse claims experience. 
   
• Life insurers offering greater premium stability to RSE licensees, post the expiry of the rate guarantee period, with material price changes due only to poor claims experience during the rate guarantee period. 

Member’s best interests:

• RSE licensees conducting a detailed review of the terms and conditions of the insurance offering considering the member demographic including:  
   
  • Identifying (and removing or changing) terms and conditions of the insurance offerings that are of little benefit to the broader membership as they are used by only a small number of members (for example, life events cover), potentially leading to higher premiums for all members.² 
     
  • Considering the appropriateness of offering high levels of death and TPD cover where those levels are not subject to underwriting.³ 
     
  • Considering the benefit term for income protection for default members, noting that a longer benefit term will result in higher premiums, which may lead to increased erosion of superannuation benefits.⁴ 
     
• Life insurers addressing sustainability concerns in the group insurance market by considering:  
   
  • Sustainability/viability of product features; 
     
  • Suitability of the product offering to the members’ insurance needs; and  
     
  • Whether the product offering represents value for money.  

Use of data:

• The collection of more comprehensive metrics to establish clear risk appetite and performance by life insurers and reinsurers in addition to financial and experience metrics. Examples of more comprehensive metrics related to:  
   
  • Accessibility of data and data quality;  
     
  • Disputes;  
     
  • Proportion of TPD claims arising from mental health related conditions to monitor the emerging trends in claims of this nature; and  
     
  • Exposures e.g., concentration risk limits, number of major schemes won or lost. 

Collaboration and communication between regulated entities:

• RSE licensees working with insurers to reach an aligned understanding of how to balance the RSE licensee’s legal duties and obligations with the sustainability of the insurance offering.   
   
• RSE licensees being clear on what it considers to be appropriate outcomes for members when designing the various elements of the insurance offering.⁵  
   
• Life insurers communicating with RSE licensees addressing the claim cause (e.g., mental health) and the premium attributable to each cause.   
   
• Collaboration between life insurers and RSE licensees to remove restrictive terms to improve member outcomes. 

Availability and Provision of Data 

The responses to the survey suggested that there has been minimal progress in relation to the availability and provision of data, noting that RSE licensees continue to experience challenges in obtaining member data from employers. 

Better practice examples noted from respondents included: 

• Collaboration between regulated entities regarding the use of data specifically:  
   
  • Life insurers proactively working with RSE licensees to raise awareness of the benefits of providing more complete and accurate datasets.  
     
  • RSE licensees maintaining accurate data to support both the management and assessment of the provision of insured benefits and the associated risks.⁶ 
     
  • Life insurers utilising the full data set held by RSE licensees to assess the profile of the membership to shape the group insurance offering to members.   
     
• RSE licensees performing data cleansing on an ongoing basis.⁷ 
   
• RSE licensees working with employers to obtain a broad range of possible sources of data whilst ensuring compliance with privacy and other legal obligations.  Additional data points include:  
   
  • Salary details;   
     
  • Occupation; and   
     
  • Work status (i.e. full/part time, casual) which assists both the RSE licensee with understanding the insurance needs of their membership and the life insurers with more accurate pricing.⁸  

APRA considers additional data could be utilised in many facets of the RSE licensee’s operations to improve understanding of the member demographic potentially to assist with the determination of retirement income strategies as required by section 52(8A) of the Superannuation Industry (Supervision) Act 1993 (SIS Act) addressing Retirement Income covenants.  

Tender Practices 

The responses to the survey suggested improvement in tender practices with responses indicating that the time provided for insurers and reinsurers to engage in tenders was, in most instances, adequate. 

Better practice examples identified from the survey responses included: 

• RSE licensees consulting with life insurers prior to commencing a tender to ensure that life insurers have capacity to participate as well as to consider the time required to allow for appropriate pricing considerations.⁹ 
   
• Life insurers adhering to internal pricing hurdles when tendering.

APRA strongly encourages RSE licensees, life insurers and reinsurers to work together to improve access to data points that will facilitate the design of benefits to align with the insurance needs of different member cohorts more closely at sustainable premium rates. As stated in paragraph 27 of SPG 250, “A prudent RSE licensee would take steps to obtain as much data on its membership as possible to ensure that the default insurance offering is appropriate for the RSE.” 

APRA will continue to monitor progress on matters raised in its letter dated 9 March 2021 to ensure sustainability of the provision of group life insurance in superannuation.  
  
  
  
Margaret Cole  
Deputy Chair

Footnotes

¹  Sustainability of Life Insurance in Superannuation. 

² Paragraph 13(d) of Prudential Standard SPS 250 Insurance in Superannuation (SPS 250).  

³ Paragraph 13(b) of SPS 250.  

⁴ Section 52(7)(c) of the Superannuation Industry (Supervision) Act 1993 (SIS Act). 

⁵ Paragraph 15 of Prudential Standard SPS 515 – Strategic planning and member outcomes.

⁶ Paragraph 16 – 25 of Prudential Practice Guide SPG 250 – Insurance in Superannuation (SPG 250).

⁷ Paragraph 15 of SPS 250. 

⁸ Paragraph 23 of SPG 250. 

⁹ Paragraph 41 of SPG 250.