5.3.1 Trustee obligations for insurance
Trustees of superannuation funds are currently subject to certain obligations under the SIS Act and the Prudential Standards relevant to insurance.
For example, the trustee of a superannuation fund covenants to do the following things in respect of insurance offered through the fund:[1]
- to formulate, review regularly and give effect to an insurance strategy for the benefit of beneficiaries of the fund. This strategy addresses the kinds and levels of insurance to be offered or acquired on behalf of beneficiaries, as well as the basis for the decision to offer or acquire the insurance and the method by which the insurer is to be determined;[2]
- to consider the costs to all beneficiaries of offering or acquiring insurance of a particular kind or at a particular level;[3]
- to offer or acquire insurance of a particular kind or at a particular level only if the cost of the insurance does not inappropriately erode beneficiaries’ retirement income;[4] and
- to do everything that is reasonable to pursue an insurance claim for the benefit of a beneficiary, if that claim has a reasonable prospect of success.[5]
The RSE licensee remains bound by its obligations to promote the financial interests of members holding MySuper products,[6] and its general covenants to perform its duties and exercise its powers in the best interests of the beneficiaries,[7] and to act fairly in dealing with beneficiaries within each class of membership,[8] including MySuper.
APRA has issued Prudential Standard SPS 250: Insurance in Superannuation (SPS 250), which has the force of law.[9]
SPS 250 imposes various requirements on superannuation trustees. These include to have: an ‘insurance management framework’;[10] an ‘insurance strategy’;[11] and a process for monitoring and selecting the insurance provided.[12]
SPS 250 also imposes requirements on trustees about the selection and monitoring of insurers. It provides that:
22. An RSE licensee must:
(a) develop and implement a selection process for choosing an insurer that includes, at a minimum, consideration of the prospective insurer’s terms of cover and exclusions, claims philosophy, the reasonableness of the premiums to be charged and terms of any delegation to any other person of functions associated with making available insured benefits;
(b) undertake a due diligence review of the selected insurer; and
(c) be able to demonstrate to APRA the appropriateness of the selection process and the due diligence review and how it is applied.
23. An RSE licensee must be able to satisfy itself, and demonstrate to APRA, that the engagement of an insurer is conducted at arm’s length and is in the best interests of beneficiaries.
24. An RSE licensee must ensure it has sufficient and appropriate resources to manage and monitor its relationship with an insurer at all times. At a minimum, the monitoring must include:
(a) maintaining regular contact with the insurer at an appropriate frequency and level of seniority; and
(b) a process for regular monitoring of performance under the insurance arrangement, including reporting to senior management against service levels.
5.3.2 Increased requirements for related insurers
Engaging a related entity as insurer presents particular issues.
The AMP case study in the sixth round of hearings provided an example of an RSE licensee that engaged another entity within the AMP Group (AMP Life) as the group life insurer of many of its funds. AMP Life also acted as the administrator of all of AMP Super’s funds, and some of NM Super’s funds.[13]
One of AMP Life’s responsibilities as administrator of the AMP trustees’ funds was to undertake ‘assessments of potential insurers’, recommend replacement insurance arrangements and assist the trustees to ‘negotiate the terms and appointment with the preferred insurer’ and to ensure compliance with SPS 250.[14]
When asked about the suitability of AMP Life undertaking tasks connected with the selection of the group life insurer, Mr Paul Sainsbury (a senior executive within AMP) said that there was sufficient separation of roles within AMP Life to satisfy the requirements of SPS 250.[15] Whether or not this is right, it highlights that, where an entity that is required to act in the interests (or best interests) of another elects to engage a related entity to provide services at the expense of those to whom the duty is owed, questions of conflict immediately arise.
I have set out elsewhere in this Report my concerns about the conflicts that arise where related parties are engaged. Those concerns have equal force in the context of group life insurance. Entities that elect to integrate their businesses do so, overwhelmingly, for their own reasons. The entity’s motivation will usually be to increase market share, to increase revenue, to increase profit, to place commercial pressure on its competitors, or some combination of those factors. That is not to deny that benefits may ultimately flow to consumers from the integrated arrangement. But because the motivation for the integration is, ordinarily, a self-interested one, the congruence of the arrangement with the duty to act in the interests of the other must be closely examined.
The need for assurance of the appropriateness of the arrangements is all the stronger in circumstances where, as with the introduction of MySuper and the requirements for default superannuation, a policy decision has been made that is, by design, protective of the interests of members.
Entities in the position of conflict described above can reasonably, and should, be subjected to a higher degree of regulatory scrutiny. As the number and nature of conflicts increases, so too should the intensity of regulatory supervision.
In the context of group life insurance, RSE licensees who engage related parties as insurers should be required to demonstrate to APRA how they are meeting the expectations of SPS 250. In particular, RSE licensees that engage related parties as insurers should be required to demonstrate that the engagement is at arm’s length and is in the best interests of beneficiaries. And because conflicts can arise not only from legal structure but also from contractual arrangements, the same obligation should apply to any RSE licensee that has a contract, arrangement or understanding with a life insurer by which the life insurer is afforded a priority or privilege in connection with the provision of group life insurance to the RSE licensee. I recommend that RSE licensees in the position I have described be required to obtain a report from an appropriately independent and qualified firm certifying that the engagement is in the best interests of members and otherwise satisfies legal and regulatory requirements.
At a minimum, that certification should be obtained before any policy of insurance is entered into and each time any policy is renewed. But because the terms of group life policies are often very long, certification should otherwise be required every two years.
The requirement for independent certification will reinforce to RSE licensees the paramountcy of member’s interests and give members comfort that the arrangements are appropriate.
The independent report should also be provided to APRA by the author of the report at the same time as it is provided to the RSE licensee. The contemporaneous provision of the report will allow APRA to form a view more quickly on the appropriateness of the arrangement and to take such action as it thinks necessary, including by referring the matter to ASIC so that it can take action to protect the interests of members.
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Recommendation 4.14 – Additional scrutiny for related party engagements APRA should amend Prudential Standard SPS 250 to require RSE licensees that engage a related party to provide group life insurance, or who enter into a contract, arrangement or understanding with a life insurer by which the insurer is given a priority or privilege in connection with the provision of life insurance, to obtain and provide to APRA within a fixed time, independent certification that the arrangements and policies entered into are in the best interests of members and otherwise satisfy legal and regulatory requirements. |
[1]SIS Act s 52(7).
[2]SIS Act s 52(7)(a).
[3]SIS Act s 52(7)(b).
[4]SIS Act s 52(7)(c).
[5]SIS Act s 52(7)(d).
[6]SIS Act s 29VN(a).
[7]SIS Act s 52(2)(d).
[8]SIS Act s 52(2)(e).
[9]A breach of a Prudential Standard is a breach of the ‘RSE licensee law’: see par (aa) of the definition of ‘RSE licensee law’ in s 10(1) of the SIS Act. Any breach of the RSE licensee law results in a breach of the conditions of the RSE licensee’s licence (s 29E(1)(a) of the SIS Act). APRA may direct an RSE licensee to comply with a condition of its licence where it has reasonable grounds to believe that the RSE licensee has breached that condition (s 29EB of the SIS Act). APRA may cancel an RSE licensee’s licence where it fails to comply with a direction (s 29G of the SIS Act) and that failure gives rise to an offence (s 29JB of the SIS Act).
[10]APRA, Prudential Standard SPS 250, 15 November 2012, [8]–[16].
[11]APRA, Prudential Standard SPS 250, 15 November 2012, [17].
[12]APRA, Prudential Standard SPS 250, 15 November 2012, [22]–[24].
[13]Transcript, Paul Sainsbury, 17 September 2018, 5861.
[14]Exhibit 6.233, Witness statement of Paul Sainsbury, 10 September 2018, 17 [67].
[15]Transcript, Paul Sainsbury, 17 September 2018, 5863.