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Parrish, Craig --- "Where are we going with insurance in superannuation? The Productivity Commission's draft report into the superannuation industry" [2018] PrecedentAULA 66; (2018) 149 Precedent 4


WHERE ARE WE GOING WITH INSURANCE IN SUPERANNUATION?

THE PRODUCTIVITY COMMISSION’S DRAFT REPORT INTO THE SUPERANNUATION INDUSTRY

By Craig Parrish

Providing a level of insurance cover automatically to Australians through their membership of a superannuation fund remains good public policy. However, the systematic issues within our financial institutions, highlighted by the evidence put before the Hayne Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Hayne Royal Commission), and the default nature of the cover, means that it is important to ensure that these arrangements are still providing value for money and cover for people and their families in times of need. This article examines the Productivity Commission’s recently released draft report into the superannuation industry and considers some of its potential implications for insurance in superannuation in Australia.

INTRODUCTION

Since 1 January 2014, trustees of regulated superannuation funds have been required to arrange Life and Total and Permanent Disablement (TPD) insurance to cover the event of death, injury or illness of their members with a MySuper account on a default, opt-out basis.[1] Some funds also elect to offer income protection cover. The provision of insurance cover on this basis is typically referred to as ‘group life insurance’. Over 12 million Australians hold insurance through their superannuation funds and 80 per cent of those are covered under the terms of group life insurance policies.[2]

But for the inclusion of group life insurance within superannuation funds, it is fair to say that many Australians would be significantly underinsured or not insured at all. The benefits of these arrangements include:

• relatively low-cost premiums compared to retail insurance products because of the large numbers of people being insured in ‘bulk’;

• the payment of premiums from the members’ accumulated account balance, rather than from their take-home pay;

• providing low-income earners with insurance cover when otherwise they would not be able to afford the cost of ongoing premiums; and

• the general lack of a requirement for a health check prior to the commencement of cover, which can allow people at risk or with chronic illnesses and disabilities to obtain a level of insurance cover which they could not receive if they applied for an individually underwritten retail insurance product.

Those practising in this jurisdiction (and others through personal experiences) will know that many people do not realise they have insurance cover through their membership of a superannuation fund, do not investigate the detail of the cover they receive, do not seek out additional cover to suit their needs in the event they become unable to work due to disability, and only become aware of any limitations of their existing cover when they come to make a claim – the time when they need the benefit the most.

This is a lucrative area for life insurers – in the 2016-17 financial year, superannuation fund members paid an estimated $9 billion in insurance premiums.[3]

REVIEW BY THE PRODUCTIVITY COMMISSION

In February 2016, then Treasurer Scott Morrison commissioned the Productivity Commission to assess the efficiency and competitiveness of the $2 trillion superannuation industry in Australia. Relevantly, one of the terms of reference for the final stage of this wide-reaching and complex assessment was an examination of insurance arrangements inside superannuation, including the impact of premiums on account balances at retirement and the extent to which insurance within superannuation offsets costs to government coffers (in the form of reduced social security payments).

A draft report was released for public consultation on 29 May 2018. A final report is expected to be handed to the government in late December 2018.

With respect to insurance within superannuation, the Productivity Commission found that ‘[i]n terms of premiums paid, default insurance in superannuation offers good value for many, but not for all, members’.[4] The Productivity Commission also identified the following concerns:

• almost 20 per cent of members have more than one account with insurance attached, which can lead to significant erosion of their retirement savings;[5]

• some members have policies that are of little or no use to them as they cannot be claimed against (which the Productivity Commission euphemistically called ‘zombie’ policies, but could otherwise be referred to as ‘junk insurance’);[6] and

• the government-prompted industry code of practice falls short of what is needed to effect genuine change.[7]

The Productivity Commission has indicated that it is likely to recommend a number of reforms, including that additional actions be taken to ‘weed out poor value policies’ such as only providing insurance on an opt-in basis to members under 25, and that cover ceases for all members on inactive accounts after 13 months (unless the member elects to continue cover).

Although it may have been outside the scope of its review, the Productivity Commission’s draft report does not recommend additional protections for consumers when they are facing the consequences of a disabling illness or injury, only to discover that they have been paying premiums for these ‘zombie’ policies which cannot assist them because of restrictive policy terms.

EXAMINATION OF THE LIFE INSURANCE INDUSTRY BY THE PJCCFS

On referral from the Senate, the Parliamentary Joint Committee on Corporations and Financial Services (PJCCFS) recently reviewed the life insurance industry in Australia and published its report in March 2018.

With respect to group life insurance, the PJCCFS considered similar issues to those considered by the Productivity Commission, including the requirement for members to opt-out of cover, member awareness of cover and the impact of premiums on small superannuation balances. However, the PJCCFS also considered broader issues including claims handling, unfair policy terms and access by life insurers to a claimant’s complete medical history.

The PJCCFS was not impressed with what it found. It expressed the view that ‘the current dearth of action by superannuation trustees and life insurers to fix the problem of duplicate insurance within group superannuation [is] completely unacceptable’.[8]

The PJCCFS also rightly pointed out that the consumer protections that currently apply to life insurance are substantially weaker than those which apply to other financial and non-financial services and other products sold together with life insurance.[9] For instance, despite the recommendations of the Productivity Commission in 2008,[10] the unfair contract terms regime and provisions prohibiting misleading and deceptive conduct under the Australian Consumer Law and the Australian Securities and Investments Commission Act 2001 (Cth) do not extend to general and life insurance policies.[11] The PJCCFS recommended that these consumer protections which currently apply to other financial and non-financial services should be extended to life insurance contracts.[12]

THE INDUSTRY RESPONSE

With these ongoing government reviews gathering momentum, the Australian Prudential Regulation Authority voicing its concerns over the behaviour of life insurers,[13] increasing media interest in declined claims and claims handling by insurers[14] and the looming Royal Commission, trustees of superannuation funds and the life insurance industry were able to read the writing on the wall and knew that they had to act.

A major response was the development of the Financial Services Council’s Life Insurance Code of Practice (FSC Code) which commenced on 1 July 2017. The FSC Code requires FSC members to:

• make a decision within six months from lodgement on all claims other than income-protection claims, including TPD claims; and

• provide a final response to complaints within 90 days if the policy is held within superannuation or 45 days if the policy is held outside superannuation.

The FSC Code also states that for claims and complaints lodged before its commencement date, ‘if the Code requires us to do something within a specified timeframe, that timeframe begins on the date we are bound by the Code’.[15]

Despite the FSC Code having only been in effect for just over 12 months, Maurice Blackburn has already seen voluminous breaches with respect to the time taken to assess claims. We have recently reported over 700 alleged breaches as a bulk complaint to the Life Code Compliance Committee, which is industry-funded and administered by the Financial Ombudsman Service.[16] We continue to see a failure from insurers to communicate properly by offering an explanation or remedy when breaches of the FSC Code occur.

The Insurance in Superannuation Voluntary Code of Practice (ISV Code), which came into effect on 1 July 2018, was another attempt at self-regulation by the industry. The ISV Code was described by the PJCCFS as a ‘somewhat tardy response to a pressing issue’.[17]

Consumer advocates have argued that the ISV Code also lacks the regulatory teeth to significantly impact such trends. Some of its deficiencies include that it:

• allows fund trustees who do sign up to opt out of any specific aspects of the ISV Code;

• is not contractually binding;

• has no code administrator to enforce it or ASIC oversight – instead it relies upon self-reported breaches;

• has a particularly long transition period for compliance (2021); and

• is not compliant with ASIC Regulatory Guide 183: Approval of Financial Services Sector Codes of Conduct.

Self-regulation by the industry has therefore provided insufficient protection for consumers and does not appear to be the answer to the problems which have been identified time and time again.

PROPOSED LEGISLATIVE INTERVENTION

In the 2018 Federal Budget, the government announced its Protecting Your Super package – described as a suite of reforms to ‘guard against the undue erosion of superannuation balances through excessive fees and inappropriate insurance arrangements’[18] – and released an exposure draft of the Treasury Laws Amendment (Protecting Superannuation) Bill 2018.

Schedule 2 of the Bill, if enacted into law, would have the effect of ensuring that cover is offered on an opt-in basis for accounts of new members aged under 25 years, all accounts with balances below $6,000 and accounts which have been inactive for 13 months. With any legislative reform, it is important to consider the wider implications and consequences (both intended and unintended).

As was pointed out by the ALA in its submission to the Productivity Commission, making life insurance (which pays a benefit to the dependants of an insured person upon their death) an opt-in for people under 25 years of age strikes a logical compromise between cost and value. It is not a well-targeted default insurance product for this cohort, as they are much less likely to have financial dependants or mortgages.[19]

However, under the proposed arrangements, if someone aged 25 and over has a superannuation account balance of less than $6,000, they will be left without any default insurance cover at all, including for TPD. Superannuation account balances may be under the $6,000 threshold for a number of reasons: because they are accounts held by people working intermittent casual jobs (which is becoming increasingly common); because someone has started a new job and their employer is now paying superannuation contributions into a different default fund; or because an employer is failing to make timely superannuation contributions.

According to the Australian Bureau of Statistics, the median weekly earnings for workers between 25 and 35 years of age is $1,150 per week.[20] The compulsory employer contribution, based on this rate of pay, would be $109.25 per week. At that rate it would take a new account holder almost 55 weeks to get to the $6,000 threshold, not allowing for the deduction of administration and investment fees. This would mean that this average younger worker could be uninsured for more than a year before the appropriate cover commences.

The assumption that all members of a superannuation fund under 25 years of age do not need or want insurance also warrants further consideration. For instance, young tradesmen, particularly those working in construction, arguably have a greater need for TPD insurance cover than their older counterparts who work in less dangerous or physically demanding roles. There is also evidence to suggest that young people under 25 years of age are more at risk of hospitalisation for sports-related injuries, serious injury from road accidents or injury related to the overconsumption of alcohol and other substances.[21] In the event someone under 25 suffers total and permanent disability, the absence of life insurance could leave them (and their families) exposed to the possibility of having to fend for themselves on social security payments and attempting to cover the cost of medical expenses which may or may not be covered by other forms of insurance (for example, through a statutory compensation scheme, such as WorkCover or the TAC in Victoria).

As we know that many people are not actively engaged with their superannuation funds, communicating the implications of any changes implemented by the government and superannuation funds will be crucial in order to allow people time to consider their options and to make informed decisions about opting in to ongoing cover or seeking out alternative protection.

FURTHER CONSUMER PROTECTION MEASURES NEEDED

The current focus of reform appears to be on ensuring that members’ retirement savings are not unnecessarily or aggressively eroded by insurance premiums. This is a laudable policy aim but it does not address the practical issue of members paying for insurance which, unbeknown to them, they can never actually claim against because of restrictive and unfair policy terms.

Many of us acting for consumers have seen that some insurers have effectively created junk insurance by introducing unreasonable thresholds, eligibility rules and definitions, and excluding claims when a member has an entitlement under multiple insurance policies (despite the fact that the insurer has enjoyed the benefit of ongoing premiums). These hurdles are certainly not confined to people under 25 years of age. Under the current legal regime, people with junk insurance policies are often left without cover and with limited legal recourse.

If an individual wishes to take legal action against the insurer, the Insurance Contracts Act 1984 (Cth) (ICA) specifically provides that relief can only be sought under that Act and cannot be sought on the grounds that the insurance policy is ‘harsh, oppressive, unconscionable, unjust, unfair or inequitable’.[22] Therefore, consumers are left to rely upon ss13 and 14 of the ICA and common law notions of good faith to challenge the unfair term/s relied upon by the insurer. Section 13 of the ICA requires each party to act towards the other party with the utmost good faith. Section 14 provides that a party may not rely on a provision in an insurance policy if that reliance would be to fail to act with the utmost good faith. There is limited jurisprudence on these provisions. There is also legal uncertainty regarding the extent to which a group insurance member can rely on these provisions, as they are not actually a party to the insurance contract between the superannuation fund trustee and the life insurer.

The trustee owes a common law fiduciary duty to its members as well as duties under the Superannuation Industry (Supervision) Act 1993 (Cth) (SIS Act) to act in the best interests of members[23] and to ‘only offer or acquire insurance of a particular kind, or at a particular level, if the cost of the insurance does not inappropriately erode the retirement income of beneficiaries.[24] Again, these duties lack the specificity to make this a straightforward cause of action for consumers, particularly in relation to reliance by trustees and insurers on unfair policy terms when they decline a claim.

As has been argued by many others acting for consumers, it is time to extend the unfair contracts regime under the Australian Consumer Law to life insurance policies.[25] It was pleasing to see that on 18 December 2017 the government announced that it would extend the unfair contract term provisions to insurance policies and a consultation process about the best model to implement this policy was initiated by Treasury in June 2018.[26]

CONCLUSION

Through its examination of superannuation (in August 2018) and insurance (in September 2018), the Hayne Royal Commission shone a spotlight on the behavioural and cultural issues that those practising in this jurisdiction see and navigate every day and has uncovered disappointing practices which may have otherwise escaped broader public scrutiny. For instance, the Royal Commission has brought to light widespread fee-gouging which was abetted by trustees of retail superannuation funds, leading to significant erosion of the retirement savings of many hard-working Australians and, in some instances, a lack of insurance cover at the very time it was needed.[27]

In asking why some of these practices were happening, Commissioner Hayne posited that ‘[t]oo often, the answer seems to be greed – the pursuit of short term profit at the expense of basic standards of honesty’.[28]

It is clear that the current regulatory framework and consumer protections are insufficient and that genuine reform is needed. One suspects that this will only be confirmed when Commissioner Hayne hands his final report to the Governor-General by 1 February 2019.

Reform is on the agenda. The draft recommendations of the Productivity Commission and the recommendations of the PJCCFS discussed in this article, if implemented, are steps in the right direction. The extension of the unfair contract terms regime to insurance, if brought into law, would be a welcome and overdue reform. Together, these reforms would go a long way to making the legal framework around insurance in superannuation fairer for all.

Craig Parrish is an Associate in the Superannuation and Insurance practice at Maurice Blackburn Lawyers. PHONE (03) 9605 2781 EMAIL cparrish@mauriceblackburn.com.au.


[1] Section 68AA of the Superannuation Industry (Supervision) Act 1993 (Cth).

[2] Productivity Commission, Superannuation: Assessing efficiency and competitiveness, Draft Report, April 2008, 316.

[3] Ibid, 477.

[4] Ibid, 53.

[5] Ibid, Figure 8.8, 327.

[6] Ibid, 311.

[7] Ibid.

[8] Parliamentary Joint Committee on Corporations and Financial Services, Life insurance industry, Report, March 2018, xi.

[9] Ibid, ix.

[10] See Productivity Commission, Review of Australia's consumer protection policy framework, Inquiry Report No. 45, Vol. 2, 2008, 58-61.

[11] Section 15 of the Insurance Contracts Act 1984 (Cth).

[12] See above note 8, 48.

[13] Australian Prudential Regulation Authority, Letter to life insurers on group insurance,

18 May 2015, <http://www.apra.gov.au/lifs/Pages/Letter-to-LI-entities-on-Group-Insurance-18-

May-2015.aspx>.

[14] See, for example, A Ferguson, ‘Lipstick on the piggy banks won’t cut it’, The Sydney Morning Herald (online), 6 August 2016, <http://www.smh.com.au/business/comment-and-analysis/stop-pussyfooting-around-and-call-a-royal-commissioninto- banks-20160805-gqlo32.html> .

[15] Clause 2.9 of the FSC Code.

[16] See Maurice Blackburn’s submission to the Hayne Royal Commission dated 5 April 2018.

[17] See above note 2, 62.

[18] See <http://kmo.ministers.treasury.gov.au/media-release/050-2018/> .

[19] ALA submission to the Productivity Commission regarding the Stage 3 draft report, 11 July 2018, 4.

[20] See ABS spreadsheet numbered 63100DO018_201308, Employee earnings, benefits and trade Union Membership, August 2013, <http://www.abs.gov.au/AUSSTATS/subscriber.nsf/log?openagent & 63100do018_201308.xls & 6310.0 & Data Cubes & C1143EEA318F8D9ECA257CEC001E0C2A & 0 & August 2013 & 04.06.2014 & Latest> .

[21] See <https://youthsafe.org/free-resources/facts-figures/>.

[22] Section 15 of the ICA.

[23] In Manglicmot v Commonwealth Bank Officers Superannuation Corporation Pty Ltd (2011) 282 ALR 167; [2011] NSWCA 204, Giles JA held that there is no material difference between the trustee’s duties at common law and their duties under the SIS Act.

[24] Section 52 of the SIS Act.

[25] See, for example, Consumer Action Law Centre, Denied: Levelling the playing field to make insurance fair, February 2018.

[26] Australian Government Treasury, ‘Government responds to Northern Australia Insurance Premiums Taskforce and General Insurance Senate Inquiry’ (Media Release, 18 December 2017) <http://kmo.ministers.treasury.gov.au/media-release/120-2017/> .

[27] See, for example, A Klan, ‘Immunity of super trustees astounds legal experts’, The Australian (online), 14 August 2018, <https://www.theaustralian.com.au/news/immunity-of-super-trustees-astounds-legal-experts/news-story/7947498980ce7e5d4d9407c8590c6398?csp=210f267052ae71d1eec05c88944f569c>.

[28] Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, Interim Report, 28 September 2018, xix.


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