The Financial Services Council (FSC) says superannuation fund trustees should be allowed to select their group life insurance providers rather than be part of a government-run tender process.

In a submission to a Productivity Commission review of the super industry, the FSC says the proposal for a central government body to specify products such as life insurance is flawed.

“We believe trustees are in a unique position to understand their membership intimately and are best placed to design and develop insurance that best meets the needs of their membership demographic,” the submission says.

“We are concerned a government-run tender process would restrict the ability of trustees to negotiate competitive insurance arrangements based on default cover being allocated on a compulsory basis.”

The FSC believes a government-run insurance system would restrict trustees’ ability to offer automatic cover, due to the need for members to provide evidence of their health.

It would also stop funds designing insurance for the needs of a particular workforce, leading to higher premiums.  

There is a danger of cover being arranged depending on a member’s wealth, the FSC warns.

“A member with higher assets may be in a less risky occupational segment, and as such may pay a cheaper premium.

“This would mean the potentially higher claim costs associated with a higher-risk occupation would be spread across like members who are less able to afford these costs.”

A central insurance system would also reduce competition and potentially stifle innovation, the FSC says.

If insurers cannot produce different products, they may withdraw capital from their life operations, resulting in a limited number of providers.

The council argues there is already a working oversight system for group life insurance, through the Insurance Management Framework prudential standard, to which trustees must adhere.

“The framework requires trustees to take into account the specific needs of their membership, defines their principles for their planned insurance design and considers the impact on the retirement outcomes of their members,” the submission says.

“We believe the framework is an appropriate oversight mechanism for trustees to design the product features appropriate for their membership cohort.”

The FSC says any changes to group life should be made through the framework.