LPG 270 Group Insurance Arrangements

This PPG provides guidance to insurers on prudent practices for group insurance arrangements with regards to the identification of risks, responding to tenders and data management. It also discusses the implications for insurers of SPS 250 which sets requirements for RSE licensees with respect to making insured benefits available to superannuation fund beneficiaries.

Under the SIS Act, an RSE licensee is generally required to provide death benefits and permanent incapacity benefits to all MySuper beneficiaries on an opt-out basis. An RSE licensee can also make certain types of insured benefits, including income protection, available to members. Self-insurance by an RSE licensee is only permitted in the limited circumstances set out in regulation 4.07E of the Superannuation Industry (Supervision) Regulations 1994 (SIS Regulations).

An RSE licensee is ultimately responsible for having an insurance management framework that reflects the risks associated with making the insured benefits available to beneficiaries. However, insurers, administrators and other parties also have roles and responsibilities in relation to the provision of insured benefits. APRA expects the insurer to understand the roles and responsibilities of all parties involved in the insurance arrangements of an RSE licensee.

Prudential Standard CPS 220 Risk Management requires an insurer to maintain a risk management framework, being the totality of systems, structures, policies, processes and people within an insurer that identify, measure, evaluate, monitor, report and control or mitigate all internal and external sources of material risk. Insurance contracts expose an insurer to a range of asset, insurance and operational risks. Many of these risks are common to both individual and group insurance contracts. However, there are risks specific to group insurance that, if material, a prudent insurer would ordinarily identify within the risk management framework and take into account (together with other considerations) in pricing and the assessment of capital adequacy. These include, but are not limited to:

inaccurate or incomplete claims or other data being:

provided to the insurer by an RSE licensee or other external party such as a previous insurer or administrator; or

maintained by the insurer.

This can increase the risk that the premium rates will be inadequate and/or the liabilities will be understated. APRA expects that externally-sourced claims data would be regularly updated in order to ensure that it includes all reported claims. Refer also to paragraphs 37 to 40;

failure by the insurer to identify adverse trends affecting future claims experience or failure to give sufficient weight to the uncertainty inherent in such trends. Examples of issues that could result in adverse trends include changes to benefit designs (including increases to automatic acceptance limits), changes to the membership profile, increases in the level of awareness by beneficiaries of their entitlement to claim insured benefits, changing social attitudes to disability (e.g. in the area of mental health), greater involvement of lawyers in the claims process, increasing delays in the reporting of claims and differences in claims philosophies between previous and current insurers;

failure by the insurer to adequately allow for the cost of profit-sharing arrangements. Complex modelling of the potential outcomes may be necessary as the insurer typically bears 100 per cent of losses but retains only a portion of profits;

inadequate internal processes for responding to tenders. The insurer may not have sufficient staff with appropriate experience and expertise to be able to complete a thorough analysis of the tender in the time available. This can lead to inadequate premium rates or inappropriate terms and conditions being offered;

anti-selection against the insurer by new or potential members. Anti-selection can occur when new members with a higher than expected risk of claim take out insurance cover with limited or no underwriting. It can also occur if potential members with a lower than expected risk of claim choose to opt out of cover or where members delay or bring forward making a claim in response to changes in benefits or terms and conditions;

exposure of the insurer to catastrophe risk through a concentration of insured lives in a single location;

high aggregate exposures to individuals who obtain insurance under several policies. The insurer may not be able to monitor or reinsure these exposures if it has inadequate data on the individual members of group schemes;

operational and insurance risks arising from the outsourcing of insurance management functions to an RSE licensee or administrator. Outsourced functions may include the assessment of eligibility for cover, claims management, data management, exercise of defined and limited discretions in relation to the setting of premiums, and claims decisions;

operational risks associated with the outsourcing of member services to the insurer by an RSE licensee. The insurer may be responsible for notifying members of the commencement and termination of coverage and of any special conditions applying to their benefits. The insurer may be responsible for providing and maintaining systems that allow members to enquire about their benefits, to apply for additional cover or cancel their existing cover. APRA expects the insurer would ensure that all communications and systems accurately reflect the terms of the insurance contract;

operational risks associated with the need to recruit additional administration staff with appropriate experience and expertise if the insurer is successful in taking over a large group scheme; and

legal risks relating to takeover terms when an RSE licensee transfers a group scheme from another insurer. These terms specify when the insurer becomes responsible for claims and the terms on which it takes over the cover.

Gaining or losing a large group life scheme can result in sudden and significant changes to the risk profile of an insurer. APRA expects that an insurer would consider reviewing its risk management framework in response to such changes.

Group insurance is often arranged through a tender process. APRA expects a potential insurer to address the following issues in its response to a tender:

the insurer’s claims philosophy (under SPS 250, an RSE licensee must consider an insurer’s claims philosophy);

the cost of insurance and the other terms and conditions of the insurance contract. These include, but are not limited to, takeover terms, profit-sharing, automatic acceptance limits, eligibility requirements, underwriting requirements for optional cover or cover in excess of the automatic acceptance limits, occupational loadings and premium loadings and benefit exclusions for policies accepted on other than standard terms;

the sustainability of the premium rates and terms and conditions of the insurance contract;

the services offered by the insurer under the agreements accompanying the insurance policy, including claims and data management, underwriting and reporting provisions;

the terms of any relevant outsourcing of functions to an administrator or other entity; and

the need for the insurer to comprehensively review the administration of the insurance arrangement on a regular basis.

A number of these issues are also relevant where schemes are being renewed without tender.

An insurer’s claims philosophy captures the insurer’s current approach to claims assessment, administration and settlement. This would include its expectations of claimants (e.g. in respect of the burden of proof of disability), the nature of support given to claimants, processes to be followed by the claimant and communication with the claimant. APRA expects the insurer’s claims philosophy to be clearly articulated. In particular, it is important that an RSE licensee be able to understand the insurer’s practical application of the definition of disablement.

Claims philosophy encompasses those claims management processes and controls of the insurer that support the insurer paying all valid claims in a timely manner. Examples of how the claims philosophy may be supported by an insurer include, but are not limited to:

the insurer having in place a process to ensure that all relevant information has been provided to it and a process that supports the appropriate review of previous decisions when new information comes to light;

the insurer having in place a process for providing beneficiaries with access to all material that has influenced the claims decision, when it is required to do so and having regard to any relevant privacy obligations, and the opportunity to respond and/or provide further information;

the reasonableness of the insurer’s claims requirements (and underwriting requirements if relevant);

the insurer’s approach to managing claims which arise from a past insurance arrangement where the insurer is no longer providing the ongoing insurance for an RSE;

the insurer’s awareness of case law that might affect its decision-making processes; and

APRA considers it to be good practice for the insurer to support the articulation of its claims philosophy with indicators such as:

appropriate information regarding the insurer’s rate of rejection of claims;

the insurer’s processes for monitoring the quality of claims decisions and the adequacy of claims management resources; and

the training and skills of the insurer’s claims assessors.

Other information that might be relevant includes de-identified details of specific examples of claims paid and claims denied.

APRA considers it to be good practice for an insurer’s response to a tender to advise the RSE licensee on the factors (both positive and negative) that could potentially affect premium rates and terms and conditions over time. This is particularly important if there is a significant likelihood that future changes will have a materially adverse impact on beneficiaries.

As part of an insurer’s internal processes for considering a tender, it is important for an insurer to consider the potential impact of a new group insurance arrangement on its own financial and other resources. This includes consideration of matters such as:

the amount of capital required;

the availability of capital; and

The amount of capital required will depend on the level of uncertainty around future experience. The level of uncertainty is affected by a number of factors including:

the size of the scheme, its membership profile and the range of benefits provided;

the quality of the experience data provided by the RSE licensee;

any changes to benefit design (e.g. increases to automatic acceptance levels, eligibility for cover, changes to the definition of disablement) or membership profile;

differences between the claims philosophy of the tendering insurer and those of previous insurers of the scheme;

reinsurance arrangements;

profit-sharing arrangements;

continuation options;

takeover terms;

the rate guarantee terms, including the rate guarantee period; and

risks, including those set out in paragraph 4.

APRA expects that any reinsurance arrangements would reflect the insurer’s risk appetite and be aligned with the terms of the insurance contract (e.g. with regard to guarantee periods). APRA expects insurers to also consider the counterparty risks associated with reinsurance exposures.

In order to satisfy the requirements of SPS 250, an insurance contract with an RSE licensee and/or an accompanying agreement must address the following aspects of service provision:

procedures for notification and payment of claims;

agreed service standards;

reporting requirements for monitoring agreed service standards;

the provision of data held by the insurer to the RSE licensee on an annual basis, including claims experience, membership, sums insured and premiums paid;

dispute resolution arrangements; and

liability and indemnity arrangements.

APRA considers that it would be sound practice for the service standards to cover, at a minimum, the timeframes for:

processing of underwriting of applications for insurance and the communication of the outcome of underwriting decisions to beneficiaries;

the provision of relevant member and claims information to the insurer;

processing claims, including the time taken to undertake the initial assessment of a claim;

claim decisions once all relevant information has been received; and

payment of admitted claims.

APRA expects that the dispute resolution arrangements would cover the management of disputes between the RSE licensee, the insurer and any other parties with whom the insurer has a relationship in respect of the insurance arrangement, such as an administrator where relevant. The matters that APRA would ordinarily expect to be covered include, at a minimum, how disputes relating to claims, eligibility, underwriting, premium payment, renewal, data and service standards are determined or resolved, including how a dispute is to be escalated.

APRA expects that an insurer and RSE licensee would also have documented arrangements in place, both prior to the commencement of risk and on an ongoing basis, which address matters including, but not limited to:

eligibility for insurance cover and underwriting requirements applying from time to time, including the responsibilities of the incoming and outgoing insurer, the RSE licensee or the administrator with respect to underwriting;

restrictions to benefits and premium loadings, that is, exclusions or extra premiums charged to a member or group of members based on specific conditions, including how members are notified about additional premiums;

procedures for notifying and paying claims, including the responsibilities of the insurer when communicating directly with beneficiaries;

continuation options or transfers between categories of membership, including notification to beneficiaries;

profit-sharing arrangements and experience commission terms, including their consistency with the undertaking provided by the RSE licensee under section 29SAC of the SIS Act not to charge members with an interest in a MySuper product for payment of conflicted remuneration.

An insurer would be expected to consider whether a proposed profit-sharing arrangement would result in a contract being classified as participating according to the Life Insurance Act 1995 and Prudential Standard LPS 600 Statutory Funds.

APRA expects that an insurer would be aware of the legislative requirements applying to the ability of an RSE licensee to self-insure and would take reasonable steps to avoid offering an arrangement that might result in an RSE licensee providing insured benefits that are not fully supported by an insurance policy, unless the RSE is permitted to self-insure under regulation 4.07E of the SIS Regulations.

Prudential Standard CPS 231 Outsourcing requires all outsourcing arrangements involving material business activities entered into by an insurer to be subject to appropriate due diligence, approval and ongoing monitoring.

APRA considers that any decision to outsource claims decisions can give rise to significant risks that require careful consideration and management. Claims decisions are financially significant for an insurer and can require the exercise of expert judgment. The outsourcing of these decisions to the RSE licensee (or a third party acting on its behalf) can create conflicts of interest requiring careful management. An insurer would typically consider the following factors in determining whether and how to outsource any claims decisions:

the skills and experience of those persons who will be making claims decisions;

the processes and controls in place within the service provider for the management of claims;

the financial and other resources of the outsourced provider;

the existence of clearly specified limits on the authority to make decisions (which will vary by benefit type), with decisions outside of that defined scope reserved for the insurer;

the processes in place to allow for vetting and review of decisions within the scope of the authority by the insurer;

reporting processes to allow for monitoring of the arrangement by the insurer; and

arrangements that provide for regular review of the arrangement by the insurer.

APRA considers that appropriately detailed and frequent reporting between the insurer, the RSE licensee and other parties (such as an administrator) involved in the management of insured benefits is crucial for managing the risks related to making insured benefits available to RSE beneficiaries.

APRA expects reporting to include information on emerging experience. It is particularly important to identify any adverse trends that could affect the sustainability of the terms and conditions of the contract beyond the end of the current guarantee period.

APRA expects that the insurer would have in place mechanisms to assist the regular review of its processes by the RSE licensee. This review can support the accuracy of premiums charged and claims data, and compliance of the insurer with service agreements. APRA expects that the insurer would also have mechanisms to review any processes carried out by the RSE licensee or administrator that the insurer relies upon.

If a significant commitment of resources would be needed to respond to a tender, it is good practice for the insurer to have in place a process for assessing the potential costs and benefits before making this commitment.

Prudential Standard LPS 320 Actuarial and Related Matters specifies that a life company must not issue a policy unless the Appointed Actuary has given written advice about the proposed terms and conditions of the contract, including any associated reinsurance arrangement. For group insurance tenders, the insurer typically makes a binding offer to the RSE licensee well before the policy is issued. APRA expects the Appointed Actuary’s advice to be received and considered by the life company before any such offer is made.

For large group insurance tenders the insurer may decide to vary its standard pricing policies and procedures. APRA expects that if the Appointed Actuary’s advice is not followed or if there are variations from standard pricing policies and procedures, these matters will be adequately documented and will be approved at the appropriate level of the company. The appropriate level may be the Board if the variation is sufficiently material.

APRA considers it good practice for the insurer to consider withdrawing from a tender if the time allowed for a response is insufficient for the insurer to properly consider and price the risks. Alternatively, a quotation can be made on an indicative basis with the cost of insurance and other terms and conditions subject to confirmation at a later date.

SPS 250 requires an RSE licensee to maintain records of the claims experience, membership, sum insured and premiums paid for the insured benefits for at least the previous five years. This information is important to support the tender process and orderly transition where an RSE licensee enters into an agreement with a new insurer to provide the insured benefits. Accurate claims records also support the identification, monitoring and management of the risks associated with making insured benefits available to beneficiaries.

An RSE licensee may allocate specific responsibility for the maintenance of this data to the insurer or administrator, although the RSE licensee is ultimately responsible for complying with the requirements in SPS 250.

APRA expects the insurer to provide all necessary support to an RSE licensee and/or the administrator in order to ensure that the RSE licensee can comply with SPS 250. This includes provision of advice on the specific items of data to be maintained.

The insurer would typically maintain claims experience information for its own purposes such as the determination of liabilities and capital requirements, even if the insurer has not been allocated the responsibility for maintenance of this data by the RSE licensee. The data maintained by the insurer may need to include data in respect of claims incurred under earlier contracts with the RSE licensee, even if those contracts were with other insurers. The current insurer would ordinarily take steps to enable them to obtain updates to this data on a regular basis from the RSE licensee.

If the insurer maintains claims experience information on behalf of an RSE licensee, APRA expects the information to be available to the RSE licensee in a format all potential users of the information can use and understand.

Whilst SPS 250 makes specific reference to data for at least the previous five years, APRA considers that prudent insurers and RSE licensees would maintain information over longer periods. APRA expects insurers and RSE licensees to consider the historical run-off pattern of claims when determining the length of time for which records are maintained. APRA considers it good practice for insurers to continue to maintain data in respect of each insurance arrangement beyond the expiry of insurance risk, until it is likely that the last claim payment has been made.

APRA expects insurers and RSE licensees to maintain records of sufficient detail, currency and accuracy to support both the assessment and management of the provision of insured benefits and the associated risks. This information would usually include complaints data, take-up rates of opt-in and opt-out arrangements and requests for additional cover and their outcome. Where this information is maintained by an insurer on behalf of the RSE licensee, APRA expects that the insurer would provide periodic reporting on and/or allow the RSE licensee access to relevant insurance information.

APRA also considers it important for insurers and RSE licensees to maintain a history of the pricing and design of insured benefits and membership as they have evolved over time. This includes:

changes in the type and level of insured benefits made available, as well as associated advice to beneficiaries regarding changes to their cover;

significant groups of beneficiaries joining or leaving the insurance arrangement, such as those employed by a particular employer that enters or leaves the RSE, successor fund transfers and mergers or de-mergers;

changes to insurance processes, for example, changes to administration systems, changes in marketing methods, bulk adjustments, special offers to alter the terms of insurance or changes that result in claims being reported earlier or later; and

changes in automatic acceptance limits.

APRA considers it to be good practice for a prospective insurer to ensure that appropriate validation and reasonableness checks of all data that they rely on are carried out. If an insurer is unable to fully validate the data that it relies upon, it should nevertheless have made reasonable efforts to validate the data to the extent possible. It is not good practice to assume data is complete and free of error, even though the RSE licensee has a duty of disclosure and a requirement to act in the utmost good faith under the Insurance Contracts Act 1984 (Contracts Act).

SPS 250 allows transitional arrangements for RSE licensees until 1 July 2016 with respect to the requirement to maintain at least five years of data records. An implication of this for insurers participating in tenders prior to this date is that RSE licensees may not be able to provide five years of data records.

APRA considers it to be good practice for an insurer to make allowance for any uncertainty relating to the quality of the data in the terms and conditions of the insurance offer. APRA expects that an insurer would assess the level of uncertainty regarding future claims experience and the amount of capital required to support the insurance contract. At the extreme, a potential insurer may need to consider withdrawing from the tender if the level of uncertainty and the capital requirements are excessive.

APRA does not consider it to be good practice for an insurer to waive its rights under the Contracts Act to take remedial action in the event that the data it relied on in entering the contract is subsequently found to be materially incomplete or incorrect.