Super funds are to be allowed to buy income protection insurance from any insurer, not just life companies.

The Australian Prudential Regulation Authority (APRA) plans to amend the insurance prudential standard to facilitate the broader approach.

Previously APRA wanted to limit funds to buying only from life insurers.

But APRA Deputy Chairman Ross Jones says a number of submissions on the proposed standard argue it is “unnecessarily restrictive and could result in higher insurance costs for some super members”.

“Having considered this feedback and our objectives in originally proposing this restriction, we will change the standard,” he said in a speech to an Association of Superannuation Funds of Australia lunch in Sydney last week.

“APRA’s objective in developing the standard is to ensure that trustees understand the risks associated with different insurance providers and support the proposed restrictions on self-insurance.”

Mr Jones says the standard will require funds to look at all aspects of insurance arrangements – not just premiums – when selecting an insurer. 

“It is important to ensure that the terms and conditions of all insurance products, including elements such as claims philosophy, align with the best interests of members,” he said.

“APRA will issue guidance on insurance strategy, which will include an expectation that a fund has planned for the risk that cover provided by a general insurer might not continue.”

Mr Jones says APRA is concerned at the poor quality of data being used to create group policies.

“This is a risk for both the insurer and the super fund,” he said.

“APRA supervises both industries and is not taking sides between funds and insurance companies. 

“But we will look after the interests of fund members who are entitled to payment of claims and both industries need to raise their standards.”

Mr Jones called on insurers to undertake due diligence on the quality of data provided by funds.

“Mispricing group life insurance can be very costly for an insurer, particularly as funds have become much larger,” he said. “Mispricing of risk by an insurer when tendering for the business of a large super fund is a significant issue.

“It may be that premiums are raised to cover the risks associated with potentially poor-quality claims data,” he said. 

“Alternatively, funds may find that members do not receive the benefits the fund expected for them.”

Mr Jones expects SuperStream initiatives to improve the quality of data available to trustees and their insurers, leading to “more efficient pricing of group life insurance”.