What is your insurance transition position?
The first part of this series, released on 2 March 2018, focussed on superannuation funds indicating their intention to adopt the Insurance in Superannuation Voluntary Code of Practice (Voluntary Code), and the second part, released on 27 March 2018 focussed on the claims handling process. One further key issue for funds that choose to adopt the Voluntary Code will be managing the transition process.
The Insurance in Superannuation Voluntary Code of Practice commences on 1 July 2018. The Voluntary Code provides for individualised transition plans to allow compliance with the Code to be phased in over a three year period.
Broadly, much of the Voluntary Code can be complied with by a shift in Trustee policy, as much of the Voluntary Code relates solely to Trustee processes and is within the control of the Trustee. However, there are some fundamental aspects which require involvement with insurers and may require the relevant insurance policies to be renewed (or amended) before full compliance can be achieved without financial penalty. In recognition of that, the Voluntary Code allows three full years to transition to full compliance, as three years would generally be the maximum amount of time for insurance policies to require renewal.
Key matters requiring a co-ordination between Trustees and insurers and which will likely require a transition period to be phased in include:
- Benefit design and premiums.
- Automatic cessation of cover and reinstatement.
Insurance benefits are designed for Members with respect to a particular insurance strategy. Reviewing and amending an insurance strategy is an involved process, which requires data to be clean and then to be reviewed.
Because benefit design also includes consideration of insurance that is not only ‘appropriate’ but also ‘affordable’ the benefit design process will necessarily incorporate insurance tenders, and a consideration of existing arrangements. A review of definitions used in insurance policies will require a discussion with the insurer and may only be able to be tweaked, without financial penalty, upon renewal of an insurance policy.
Assessment of whether insurance benefits are ‘affordable’ will also require an analysis of how ‘estimated salary’ is to be determined, so that premiums may be benchmarked at 1% of those ‘estimated salaries’.
Existing arrangements would ordinarily need to continue on foot until they naturally expired in accordance with the terms of that policy, or else there may be early termination penalties.
Accordingly, Trustees wanting to adopt the Voluntary Code will need to make and publish a transition plan which details the timing of when a review of members and existing benefits and premiums can be undertaken, when a review of the insurance strategy can be completed, when a tender process for the next proposed insurance offering would be made, and when the existing insurance policy expires.
Cessation and re-instatement
The Voluntary Code also requires Trustees to have a simplified approach to the cessation of cover.
That approach towards cessation of cover should include a draft suite of communication materials which explains, in clear and consistent language, the impact of insurance premiums on retirement savings accounts when there are no longer contributions, and also the impact of having either multiple coverage or of losing coverage altogether.
However, the more complex piece here will be the development of Trustee policy as to when this communication is given to Members. The Voluntary Code contains two fixed triggers for cessation of cover, being 13 months after the date of the last eligible contribution for members with income protection insurance, and an account balance of less than $6,000 for other automatic insurance Members. To ascertain when either of these triggers is activated will require good data, and internal reporting to ensure that the Trustee is aware these triggers have been activated.
The Voluntary Code requires the Trustee to offer re-instatement of insurance benefits to Members (provided contributions are made to cover the insurance premiums for the period of the cessation and going forward). This re-instatement is only required to be made during the period of 60 days after the automatic cessation of cover. However, offering re-instatement of insurance benefits may not be something the Trustee can independently do, as it involves the insurer. The Trustee ought to review the terms of the policy and determine whether the policy will require amendment going forward. Accordingly, this may be a benefit design feature that can only be complied with at the next renewal of the insurance policy.
Compliance with the rest of the Voluntary Code
Most of the rest of the Voluntary Code features matters which are within the control of the Trustee, and with which the Trustee could unilaterally determine to comply.