Key Takeaways

In December 2021, the FSC unveiled its enforceable Standard No. 27 (the Standard) which requires the removal of exclusions and restrictive disability definitions based on occupation in the design of default cover within group life policies in superannuation.

The Standard will apply to all FSC member trustees and life insurers offering default group life insurance in super. A 12 month transition period applies before the changes come into effect on 1 January 2023.

Background

After stakeholder consultation last year, the FSC Standard is the industry’s response to the unintended consequences to default insurance arrangements caused by the Treasury Laws Amendment (Your Future, Your Super) Act 2021. Those reforms, which commenced on 1 November 2021, importantly ‘staple’ a member to their existing superannuation product so as to prevent the duplication of super accounts and erosion of super with unnecessary fees. However, the consequence is that disengaged members in high risk occupations or members moving to work in higher risk industries may end up ‘stapled’ to a Fund with insurance that does not appropriately suit their cover needs.

By introducing the Standard, the FSC hopes to ensure that customers who have default cover in superannuation who would otherwise be able to claim are not prevented from making a valid claim due to the nature of their occupation.

Scope of the FSC Standard

Relevantly, the Standard will:

• be binding on both FSC trustees and life insurers from 1 January 2023;
• apply to default life cover, terminal illness, TPD and IP cover under superannuation group life policies; and
• prohibit the use of exclusions and restrictive disability definitions (being terms which prevent claims under certain definitions of disability) ‘due to one or more of the insured member’s current or previous occupational duties’.

‘Occupational duties’ is defined as ‘the duties or responsibilities of an insured member’s occupation’ and expressly excludes employment status or the hours worked by the insured member.

The change is clearly aimed at protecting members with default cover in high risk and other occupational categories to whom more restrictive definitions have traditionally applied. It does this by removing the use of occupational exclusions and occupation based restrictive disability definitions from default cover.

The initiative aligns broadly with Option 4 of Treasury’s review of occupational classifications, but also expands the prohibition by applying to all default group insurance cover including default IP cover. It also applies to members who change occupations, even if they remain with the same employer and are not impacted by ‘stapling’.

That said, the FSC recognises that there are circumstances where occupational exclusions and restrictive disability definitions can continue to apply. For example, the Standard:

• will not preclude FSC insurers from providing default cover with occupational exclusions or occupational based restrictive definitions in a group policy if a non FSC trustee requests them and considers them to be in the best interests of insured members;
• will not prevent trustees from requesting and using a member’s occupation to determine whether or not to offer default cover to a fund member;
• will not apply to additional underwritten cover (that is, cover not provided on a default basis);
• will not apply to individuals who are employed in the armed forces as they are typically covered by government-funded schemes outside of life insurance;
• will not apply to non-occupational based exclusions.

Importantly, the Standard only creates obligations between the entities bound by it and the FSC. It does not create rights for any other parties (clause 3.4) and none of the provisions of the Standard can apply to court or tribunal proceedings (clause 3.6).

Implications

The introduction of the Standard will require FSC group life insurers and superannuation trustees to look closely at group insurance arrangements providing default cover for fund members. No doubt many have already launched this process.

Whilst the FSC encourages non FSC trustees to follow the Standard, it recognises that a non FSC trustee may elect to carve out certain occupations where such terms are in the best interests of its members. In those circumstances, the FSC does not prohibit FSC insurers from departing from the Standard.

The FSC also recognises that unaffordable cover remains out of scope as there remains the option of not offering default insurance to certain members due to their occupation. These members will have no default cover but will also not pay for premiums.

FSC insurers and trustees should be prepared to justify any departure from the Standard. Good data collection and retention will therefore be more important than ever in assisting insurers and trustees in this process.