All financial services organisations should be setting up remediation projects to investigate their past and present practices, to identify examples of misconduct and ‘conduct not meeting community expectations’.
Many organisations across financial services – not just those put under the spotlight by the Financial Services Royal Commission – are undertaking major programs of remediation work. Many of these entities are super funds. While industry funds generally fared better than their retail fund rivals, the Royal Commission nonetheless identified problems across both sectors.
In the wake of the Royal Commission, the regulators now have a renewed interest in addressing failures in service delivery by super funds and other institutions.
While (for example) ASIC has had a ‘fee for no service’ project since 2015, they may be taking a harder look at problems and a harder stance on the penalties that should be pursued. It may be found that both APRA and ASIC should have scrutinised grandfathered arrangements more than they did.
Both regulators are going to be more likely to pursue public enforcement instead of enforcement ‘behind closed doors’, and APRA is likely to be rigorous in pursuing the member outcomes assessment.
The Royal Commission has revealed a diverse range of problems across nearly all types of financial services organisations, and past compliance reviews are not a guarantee of a clean slate.
This is especially the case where organisations have ‘sailed closed to the wind’ in meeting regulatory change requirements. It’s not just a matter of checking that specific regulatory requirements were met. Super funds also have the responsibility to ensure that the best interests fund members are prioritised. These responsibilities cannot be conveniently ignored in the case of grandfathered members, as seems to have happened in some cases.
What should be done?
Remediation projects start with identifying issue where processes have failed and gaps may need to be uncovered. As organisations preparing for the Royal Commission sometimes discovered, the act of investigation can unearth problems that were previously unknown.
In a previous career, there was a saying that “if you don’t think you have a unit-pricing problem, it’s only because you don’t know about it.” In today’s world, there should be no excuse for not hunting down errors that cost members money.
The prioritisation of issues for remediation will have regard to the size and complexity of the problem, the level of resourcing and timetabling needed, whether it is isolated or system and whether it relates to any existing remediation activities. However, all of these factors need to be looked from the perspective of members’ best interests, and the processes for advising and keeping members and the regulators informed.
It has been striking how long it took for the regulators to be advised in some of the cases before the Royal Commission, with it often taking much longer for members to be told. Financial institutions hold vast amounts of data but the level, quality and timeliness of data analysis in these cases – and reporting on it – was often found wanting.
Process Improvement & Governance:
The remediation process must also lead to process improvement and a focus on continuous improvement. Unnecessary hand-offs, delays and wastage, tasks that don’t add value, and inadequate performance management are sometimes found during the review process.
This is not just an operational exercise. Appropriate governance structures need to be put in place to ensure that remediation is not just about ticking off a list of fixes. Acting in members best interest needs to be assessed, as does ensuring the most efficient and cost-effective approach is taken, and that related and systemic issues have also been addressed.
Taking a Holistic Approach
The IQ Group has been undertaking analysis into compliance adherence, process and data analysis, project and change management, training delivery and team management, and are pleased that many of our clients are undertaking remediation management extremely seriously.
Written by David Haynes
If you would like to find out more or have any question, please send them through to us at firstname.lastname@example.org.
Insurance within Superannuation accounts makes up almost half of the insurance market.
Approximately 12 million Australian’s hold some type of insurance via their superannuation account. With the issue of insurance in superannuation impacting the lives – and livelihoods – of so many Australians, the Productivity Commission has taken a much closer look. From zombie policies to member disengagement, we examine the key call-outs from the Productivity Commission on whether insurance in superannuation provides value for money to members.
The Argument for Insurance in Super:
Despite being on the receiving end of a lot of criticism, insurance provided through superannuation still delivers an affordable insurance option to most Australians. The Commission found there to be many reasons to support insurance in super, including:
- Group Insurance Policies – Super uses a pooling mechanism to provide insurance policies to an entire group of people, called group insurance. Group Insurance policies can be provided at a cheaper rate than individually underwritten policies because it pools risk and reduces adverse selection. This means that an individual with higher risk factors can access insurance at a significantly cheaper rate than under an individually written policy.
- Opt-Out Arrangements – Super’s default opt out arrangement helps to address the reported problems of under-insurance. It provides a safety net to members who may have otherwise chosen not to take out life insurance – or were unable to. It can also financially benefit members who may not understand the importance of insurance.
- Financial Benefits – There are financial benefits to members paying for their insurance through super; members can pay using money that they cannot currently spend – and it is taxed concessionally.
What is Reducing the Value of Insurance in Superannuation?
Over a third of all member complaints against super funds were in relation to insurance. While there are both efficiency and member well-being benefits, the Commission identified a range of potential issues that reduced the value of insurance.
1. Member disengagement and lack of awareness.
The Commissions’ Survey found members were relatively disengaged, which made it difficult to a draw conclusion about their perceptions of value.
Most members had some awareness that insurance was bundled into their super account, but 24% had no idea. 16% indicated they knew they were paying for insurance but didn’t know what it was. Only 12% of members responded they knew a lot about insurance.
The survey showed that very few members amend or opt out of the default insurance cover. 78% of members reported never making changes to their default cover and only 6% had opted out in the past 12 months. The two most common reported reasons for not opting out were lack of knowledge (35%), and assuming the cover was appropriate (35%).
2. Inappropriate cross-subsidisation.
Cross subsidisation is the act of charging higher prices to one group of consumers to subsidise lower prices in another group. By averaging risks across a population of people, superannuation funds can offer group insurance at a relatively cheap rate.
But is appropriate cross subsidisation occurring?
For insurance to be of value, premiums need to accurately reflect the risk of the member. Some clear examples of risk factors that should affect a member’s premium include their age, smoking status, and occupation i.e. white vs blue-collar work. Unfortunately, ASIC recently noted that in some cases trustees had transferred members to different divisions of the fund and classified them by default as a smoker or blue-collar worker for insurance purposes. This resulted in higher premiums that may not reflect the risk factors of the member at all.
3. Low value policies.
The nature of group insurance means products can’t be tailored to individual needs. By providing insurance at a level that prevents excessive balance erosion for low income members, higher income members may find their automatic level of cover fails to meet their needs and preferences.
It could be said that poor tailoring of insurance can result in insurance that is low value and or causes excessive balance erosion for some cohorts of members. Funds need to use the information they collect from members to develop insurance cover that limits this undesirable outcome and better meets member needs.
4. Difficulty engaging with super funds on insurance.
Around 80% reported that modifying or taking out new insurance cover was somewhat easy, but nearly half had trouble when trying to opt out. This contracts with funds reports that their members were the most satisfied with the opt out process.
Unfortunately there weren’t enough responses collected to provide a thorough assessment of the insurance claims process, but some of the ASIC complaint findings indicated:
- The claims process involved raising awareness of insurance cover
- The process is complex and time consuming, and
- A substantial share of disputes were related back to the insurance claims process
5. Account proliferation.
It was estimated that 17% of members were holding two or more accounts with insurance in 2017. The premiums collected from these unintended duplicate insurance policies would amount to approximately $1.9 billion per year. Most of these additional accounts are likely to be inactive. It was estimated that there are approximately 3 million inactive accounts that also had insurance cover.
These additional accounts are costing Australian’s thousands over their lifetimes. It was estimated that a member with two super accounts from the age of 25 – 45 would be $55,000 worse off by the time they reach retirement than a member with only one account.
Balance erosion is especially bad for members with multiple accounts. These members may end up over-insured or find themselves unable to claim on the multiple accounts. These are also known as ‘zombie policies’.
So… Is Insurance Value for Money to Members?
For some members the default insurance in terms of premiums paid insurance in super is undeniably good value, and it can provide access to insurance for some people who might not be able to get individually underwritten insurance. However, better tailoring of group insurance to different member cohorts would improve the value of insurance to many members.
Unfortunately, there are many circumstances where insurance doesn’t provide value to members and can be detrimental toward their super balance – for example, younger workers with no dependants will get less value from life insurance, and low income earners will get less value from income protection insurance. For many, insurance provides poor value and does not meet their needs simply because they are uninformed and disengaged and do not elect to opt out as a result.
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