Addressing Group Insurance Operational Risk

Addressing Insurance Operational Risk - Sean Williamson Principal

Addressing Group Insurance Operational Risk

PFS Principal, Sean Williamson, recently produced a thought-provoking article about Operational Risk inherent in Insurance in Superannuation.

This paper addresses how insurance operational risk confronting Trustee Boards and Fund Executives is increasing as major change and complexity, primarily regulatory and mergers, continues across the superannuation system. It explores how funds can better understand these operational risks and gain more confidence in managing them.

If you would like to know more, read here: Addressing Group Insurance Operational Risk

Insurance operational risk confronting Trustee Boards and Fund Executives is increasing as major changes and increasing complexity, primarily from regulation and mergers, continues across the superannuation system.

There has never been a more challenging time for funds to effectively manage operational risk arising from the administration of group insurance, and it’s critical they take appropriate action to minimise or completely mitigate this ever-growing risk. Insurance administration within superannuation is inherently complex, but the level of complexity has increased substantially in recent years through higher levels of regulatory oversight, coupled with operational change from increasing merger activity. This, coupled with the drive for further digitisation means greater oversight is required to prevent losses arising from poor systems and processes that do not adequately deal with this complexity and change.

With end-to-end insurance administration processes requiring a high level of technology integration across fund, insurer and in many cases a third-party administrator, it is critical to ensure that processes are reviewed regularly, particularly after a major change (eg. regulatory, merger, new system, new product and rates, etc) and robust controls are in place to ensure member data is captured correctly at the outset and then flows consistently between the parties. If any errors materialise, it will lead to additional financial losses (anywhere from premium corrections for members to incorrect coverage amounts). This could inadvertently lead to funds assuming some insurance risk, and fines from regulators, of which we are seeing a higher frequency.

Identifying errors early is also important as the cost of remediating old errors is likely to be significantly higher. Further, the liability obligations for these additional costs are generally not clearly defined for a large number of funds, and their insurance partners, potentially leading to financial disputes. In addition to the financial consequences, poor end-to-end processes will lead to a poor member experience potentially at a time when competition between funds will intensify.

Conclusions

Overall, it is an area that requires a high degree of focus coupled with a deep knowledge of the insurance policy and its connection with the fund’s administration function. It is critical funds fully understand each change that occurs in their processes and systems. At a detailed level this will be from the date cover commences for a member, to the date cover ceases, and the myriad of scenarios in between that can lead to operational errors (including new reinstatement provisions resulting from recent legislation). Insurance operational risk will vary by fund and is likely to be higher for funds where greater insurance flexibility is provided to members (and employers), where increased hand-offs occur, low levels of integration exist, or where a significant amount of change has occurred recently.

In summary, Trustee Boards and Funds executives will gain increased confidence around the management of insurance operational risk if:

  • Operational processes are kept up to date, and reviewed regularly (and especially after any major change event).
  • Veracity of insurance data is regularly reviewed to ensure it complies with the PDS and insurance policy
  • Clear liability provisions exist between fund and insurer.
  • Consider what operational risk may be implicit in the fund and its partners when resolving insurance related events and complaints.

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