The Australian Prudential Regulation Authority (APRA) is looking at setting standards for life insurance within superannuation funds.

The regulator has detailed in a new discussion paper the prudential standards for providing and maintaining life and disability insurance within a fund.

Deputy Chairman Ross Jones says the proposed prudential standards will significantly strengthen the superannuation system.

“APRA has successfully established prudential standards in banking and insurance for many years, and the establishment of such standards in superannuation will provide clear benefits to the industry and its members,” he said.

Driving the prudential standards are the Federal Government’s Stronger Super reforms that will require funds to manage life insurance “in the best interests of beneficiaries”.

The reforms will also require a fund to develop and maintain an insurance strategy and offer life and disability cover for all members.

To include these legal requirements, a new prudential insurance standard will define the types and default levels of cover as well as the process for selecting and monitoring insurers.

“This would include an assessment of the insurer that is to provide the cover, the policy’s benefits and conditions and the cost effectiveness of the coverage, among other relevant factors,” the APRA paper says.

“APRA’s expectations of better practice in the development of an insurance strategy would be developed in a new prudential practice guide.

“This might include a process for selecting and monitoring insurers and an approach to management of insurance claims.”

The regulator plans to issue a separate practice guide on how a fund might set the default levels of insurance as well as the factors enabling a member to drop out or opt back into their cover.  

The standards will only apply to life and disability insurance, meaning funds offering income protection cover for members will have to withdraw such products.

Funds that are self-insuring, except in certain cases, will also be expected to unwind any arrangements “within a short period of time” under the new proposed standards. 

Submission on the APRA paper must be submitted by December 23.