APRA progresses Prudential Standard 250 governing insurance in superannuation
- Newsletter Article
- Published 08.04.2021
In January this year, the Australian Prudential Regulation Authority (APRA) commenced its second round of consultations on revisions to Prudential Standard SPS 250 Insurance in Superannuation (SPS 250).
The proposed changes to SPS 250 were aimed at improving superannuation member outcomes by helping trustees select the most appropriate insurance policies for their members and monitor their ongoing relationships with insurers. This initially included making it easier for members to opt-out of insurance, and otherwise ensuring that premiums don’t inappropriately erode members’ retirement income. Since then, further industry consultation has resulted in additional revisions to the draft SPS 250.
A Brief Re-Cap
SPS 250 was originally devised back in July 2013 to provide guidance for registrable superannuation entities (RSE’s) on APRA’s view of sound practices with respect to ‘Insurance management framework’, ‘Insurance strategy’, ‘Selection of insurer’ and ‘Insurance arrangements’ among other things.
The subsequent Financial Services Royal Commission recommended further improvement to these practices. Specifically, increasing scrutiny of related party engagements for insurers of superannuation members through group life policies (Recommendation 4.14) and ensuring that any status attributed to a beneficiary in connection with the provision of insurance is fair and reasonable (Recommendation 4.15). For example, ‘blue-collar’ or another status, such as ‘smoker status’, that may affect the premium to be charged for insurance.
In order to reflect these recommendations, APRA sought widespread industry consultation on a proposed draft SPS 250 which begun back in November 2019 and concluded in February 2020. The intention was to update and finalise SPS 250 by mid-2020 in the hope that the revised standard would come into effect on 1 January 2021.
However, the planned roll-out for 1 January 2021 was halted as a number of industry submissions sought further information about particular aspects of the proposed changes to SPS 250. As a result, APRA released a new draft SPS 250 for further consultation in January this year, incorporating new and additional wording aimed at clarifying some of the revised requirements of SPS 250. Submissions on both the further draft SPS 250 and the accompanying prudential practice guide closed on 5 March 2021 with APRA intending to finalise both documents by the middle of this year, with SPS 250 to take effect from 1 January 2022.
Focus of Further Revisions
Though feedback following the initial consultation in November generally supported the initial proposed revisions, subsequent industry feedback focused on the ‘independent certification requirements’ for RSE’s and the ‘meaning of priority and privilege in non-related party insurance arrangements’. The idea was to ensure that RSE licensees satisfy APRA that the engagement of an insurer is conducted at arm’s length and is in the best interests of beneficiaries.
Under the new revisions, RSE’s must undertake a detailed examination of their chosen insurance arrangements and perform the requisite due diligence once an insurer has been appointed. Further, the appropriateness, effectiveness and adequacy of its insurance management framework will be subject to a review by operationally independent, appropriately trained and competent persons at least every three years.
Given the risks associated with conflicts of interest, an independent certification is required for insurance arrangements with connected entities and for arrangements that provide a priority or privilege to an insurer.1
Specifically, where an insurer that is a connected entity, or in some way related to an RSE licensee, is party or will be party to an insurance arrangement with the RSE licensee, that RSE licensee must obtain an independent certification that states:
(a) it is reasonable to form the view that the insurance arrangement is in the best interests of the beneficiaries; and
(b) the insurance arrangement otherwise satisfies all applicable legal and regulatory requirements.
Similarly, where an insurer that is not a connected entity of an RSE licensee, or in no way related, but has been selected to provide insurance cover for the RSE’s members and where a contractual term of the insurance arrangement provides the insurer with a ‘priority or privilege’, the RSE licensee must obtain an independent certification that states it is reasonable for the RSE licensee to form the view that the insurance arrangement is in the best interests of the beneficiaries.
According to the prudential Practice Guide, ‘priority or privilege may occur where the terms of an arrangement provide the insurer with a current or future competitive advantage relative to other insurers, or where the terms of an arrangement favour the insurer relative to the RSE licensee or the beneficiaries of the superannuation entity.’
Practically speaking, APRA expects that:
‘a person that provides an independent certification of an insurance arrangement is required to be independent of the RSE licensee and the insurer, and is expected to have suitable expertise, experience and knowledge, to effectively assess and evaluate the terms and conditions of an insurance arrangement. APRA considers that independent certifications will likely be provided by qualified and experienced persons associated with audit firms, actuarial firms, legal firms or other firms recognised in the superannuation and insurance industries, and expects that appropriate external sources of expertise will be sought where relevant.’
The proposed revisions also set out the various compliance timeframes for RSE licensees, with differing requirements for those insurance arrangements ending after 1 January 2023 (connected entities) and for those ending after 1 January 2025 (non-connected entities). Furthermore, once the required certification is obtained, RSEs must provide APRA with the certification no more than five days after the certification is obtained.
At the heart of these further revisions to SPS 250 is the safeguarding of members’ interests. This is of course regardless of whether the RSE licensee is connected to the insurer or not. Clearly, the purpose of these further revisions to SPS 250 is to rebuild consumer confidence and trust in the industry and it would appear that the industry itself has been keen to support the changes providing further input and key submissions in support of the changes.
As for the RSE licensees, the principle takeaway is that they must have their house in order when it comes to their group insurance arrangements, whether that be in relation to the selection process, the ongoing management of the insurance arrangement or the revised certification requirements. It appears that APRA will be looking closely at the arrangements in place and keeping an eye on whether they ultimately benefit superannuation members. RSE licensees must investigate what is required in terms of the expected due diligence and obtaining the necessary certification ahead of the deadlines and timeframes set out in the revised draft SPS 250, expected to commence from 1 January 2022.
1Prudential Practice Guide, Draft SPG 250 – Insurance in Superannuation January 2021