The Australian Prudential Regulation Authority (APRA) will allow superannuation fund trustees to offer insurance services through general insurance companies rather than through life insurance providers alone.

The prudential regulator will revise its prudential standard, SPS 250 Insurance in Superannuation, to reflect that trustees can offer general insurance through all licensed insurance providers and will issue guidance on insurance strategies for funds.

APRA deputy chair Ross Jones said the prudential regulator had changed its mind after industry feedback persuaded it of the negative effects on the level of competition in the industry.

"Having considered the feedback and considering what our objectives were in initially proposing the restrictions, I'm happy to say that we will change the standard," Jones said at an Association of Superannuation Funds of Australia (ASFA) presentation yesterday.

"RSE (registered superannuation entities) licensees will not be restricted now to only seek income protection from life insurers and the standard will in fact be adjusted to reflect this position.

"Our initial response was possibly prescriptive and it is possible to achieve the appropriate outcome, I think, by just making the amendments."

The regulator had argued in a submission to the draft prudential standards that the negative effects caused by the standard would outweigh the benefits, because it would restrict competition and drive up fees for members.

"ASFA disagrees with any proposal that requires all insurance offered through superannuation funds to be offered by a life company," it said in a submission to APRA.

"We believe the potential negative impact on fund members and beneficiaries of this proposed restriction far outweigh any issues it is designed to remedy.

"If APRA's intention regarding the restriction on general insurance is carried through to the implementation of the prudential standard, it will mean that these RSE licensees could not maintain their current arrangements.

"They would need to withdraw from their current income protection contracts and find alternative cover through a life company, which would likely lead to an increase in cost to members."

Jones said the prudential regulator had initially restricted the sourcing of insurance services to life insurance companies, because there were differences in the application of the regulations to general and life insurance policies.

But Jones now said the initial standard was too prescriptive and the issue could be overcome by requiring trustees to ensure insurance terms and conditions matched the best interests of members.

"We had a look at it and said 'we can still achieve our objectives by saying trustees must be aware of all these issues associated with it, and as long as you are aware of this and have a mechanism to ensure members are not disadvantaged at the end of the three-year period, then we don't really have a problem as to where you get the insurance from'," he said.