The Productivity Commission is calling for an independent public inquiry into group insurance and floated the possibility of tougher regulation that includes sharper ASIC oversight, among other recommendations.
Recommendation 18 in the Productivity Commission's final report pushes for an inquiry no later than four years from now.
The Commission said it wants to undertake a cost and benefits analysis of retaining current insurance arrangements on an opt-out - as opposed to an opt-in basis - and consider more "prescriptive regulation" for the sector.
While default insurance in superannuation offers good value for many members, it offers little or no value to some, it said. This is because it is "ill-suited" to their needs or that members are not able to claim against the policy.
As part of the proposed inquiry, the Commission wants to analyse where group insurance overlaps with other schemes such as workers' compensation, and consider how best to provide assistance to people in the event of illness and injury.
This includes looking at it opt-out insurance through superannuation is the most efficient and equitable way to do so.
The Commission also wants the Insurance in Superannuation Voluntary Code of Practice to be binding and enforceable, and that a joint regulator taskforce is set up to make it more effective.
ASIC and APRA should be members of the taskforce, with ASIC taking the lead, it recommended.
In September 2018, ASIC acknowledged the group insurance industry's effort to self-regulate via the code - but highlighted the limitations.
The Commission blamed income protection insurance and unintended multiple insurance policies to be the "main culprits" of worthless policies.
It fears that deducting insurance premiums can have a material impact on member balances at retirement.
This is particularly costly to members with low incomes, whose retirement balances can be eroded by up to 14% by insurance premiums.
Unintended multiple accounts cost members nearly $1.9 billion a year in excess insurance premiums and $690 million in excess administration fees, the report noted.
This could cost a member 6% or $51,000 of their retirement savings.