Some retail superannuation funds are supplying insurance products to their members from related companies which are more costly than in circumstances where the insurer is not related to the super fund, according to a new report from the Australian Prudential Regulatory Authority (APRA).
The APRA report, Superannuation and insurance: Related parties and member cost, examined 52 retail superannuation funds and found that a member of a super fund bound to buy insurance from a related insurer paid average annual premiums of $252, or roughly twice the average insurance premium across all other types of super fund.
However, the benefits received by the fund member were only approximately 20 per cent more on a per capita basis, the report found.
For 20 of the 52 retail sector superannuation funds, the trustee was related to an insurance company. Upon examination, eight of the trust deeds governing those funds required the trustee to use a related insurance company. The trust deeds of 11 other super funds nominated a retail insurer but had no such binding instruction.
When APRA revised its analysis to incorporate this 'compulsion' factor, the findings revealed a greater cost to members.
"We found that members of 'bound' funds, where the trustee is required to use a related insurance provider, paid more for insurance coverage than members of funds without a binding tie-up."
Not only did members in bound super funds purchase more insurance, but their coverage was by way of higher-cost products, the report found.
"The temptation for trustees to allow [insurers to earn a super profit to the detriment of super members] is greatest when the life insurance company is a related party," the report said. The report, however, didn't mention which retail funds were most likely to overcharge members on insurance.
The report backs up previous research by APRA in 2010 showing that some trustees of retail superannuation funds were prone to paying higher fees to related service providers.
The superannuation sector has become increasingly important to the life insurance industry. Currently, superannuation-related policies account for 42 per cent of all term-life and disability premium income. When looking solely at group policies, the superannuation sector accounts for 87 per cent of the gross revenue of insurers.
The advent of MySuper in 2013 is expected to enhance that trend. As part of Stronger Super changes starting in July, superannuation trustees must offer life and total and permanent disability (TPD) insurance on a default opt-out basis to all members in MySuper and choice products.
However, super funds won't have to offer income protection (IP) cover. It will be left to a trustee's discretion whether to offer income protection insurance or not, judging the needs of their members.
