Group insurance premium arrangements unclear: ISWG

The lack of understanding and poor transparency around premium adjustment mechanisms have emerged as major concerns in the latest Insurance in Superannuation Working Group discussion paper.

Greater disclosure on premium adjustment mechanisms should be codified and addressed on a whole of industry basis, according to the discussion paper. It added tighter rules should be introduced so that any surpluses that arise are immediately credited directly back to members.

There are currently no requirements for super funds to disclose whether or not it uses a premium adjustment mechanism.

"It is this opaqueness that lends itself to concerns that these adjustment arrangements may be used inappropriately," the report said.

Among the proposed solutions, funds should have a premium adjustment mechanism policy in place and link to its insurance reserve policy.

Premium adjustment mechanisms are an arrangement between super funds and insurers to return a portion of group risk premiums payable to the fund when the amount of claims are less than anticipated.

In some cases, payments are returned to the insurance company as an allowance for future premium increases.

Premium adjustment mechanisms are a means of dealing with uncertainty involved in setting premium rates within group insurance policies, and aim to keep insurers in check by not making excessive profits at the expense of super members. They are commonly used by larger super funds, as well as in corporate or employer plans within super funds.

In the report concerns were also raised about how conflicts of interest are managed and inappropriate payments were being made to third parties, which can arise from trustees with an incentive to deny claims in order to maximise rebates.

ISWG chair Jim Minto said: "Given the public interest in these mechanisms, it is very appropriate arrangements are formalised consistently in all cases, properly disclosed and operate within tight parameters that protect members' interests."

"Under this proposal any excess that arises can only be used by a trustee to offset future premiums for insured members," he said.

The ISWG's discussion paper is the fifth in a series released by the group aiming to make improvements in super members' experience. Established in November 2016, the group is making inroads in drafting a Code of Practice expected to be released in November.

Read more: ISWGInsurance in Superannuation Working GroupCode of PracticeJim Minto
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