Insurers may decide to withdraw group insurance coverage for small retail clients and super fund trustees if they are caught in the Treasury’s draft design and distribution obligations (DDO), the Financial Services Council (FSC) warns.

The draft DDO regime excludes wholesale clients if they have 20 or more employees or manage a super fund with more than $10 million in assets. The exclusion would apply when a group insurance policy is being issued to such clients.

But the FSC submission says some small retail businesses and trustees that fall under those employee or asset thresholds operate in the same way as wholesale clients, and it wants these clients to be included under the exemption.

Insurers and brokers undertake the same processes for issuing and distributing a policy to these small retail businesses as they do for wholesale clients, with the policy designed to cover a number of people, it says.

The FSC says if the DDO applies to these small businesses or trustees, insurers may decide to withdraw coverage as the costs of complying with the regulations may outweigh the benefits. Brokers may also abandon this part of the market because the distribution and reporting obligations will outweigh the benefits, it says.

“Brokers play a significant advice role to this segment and the service often extends to insurance administration services by the broker for the business or fund,” the submission says.

“We believe the risk of brokers exiting this segment is not a small one given there are no current broker to insurer reporting or monitoring requirements associated with the distribution/sale of any policy.”

It may result in small businesses and funds being unable to secure a group life policy or unable to get advice and administration servicing for the insurance needs of its employees or members, the FSC says.

A carve-out should be included in the regulations so that any group insurance policy issued to an employer or trustee would be treated the same as if it were issued to a wholesale client, it adds.