Interpreting the High Risk Occupation carve out under PMIF
- On 02/12/2019
- insurance, PMIF
Almost immediately following the recent Protecting Your Super (PYS) changes, the Treasury Laws Amendment Putting Members’ Interests First (PMIF) Act 2019 was passed and requires default insurance to be opt-in for members with balances under $6,000 and new members under age 25 from 1 April 2020.
Industry research has shown that the PYS opt-in rates for young members and low account balance members have typically been some of the lowest experienced across the industry. Trustees may therefore find that PMIF opt-in rates will be extremely low.
The PMIF legislation has also introduced some exceptions, most notably where the Trustee has determined that an emergency services worker or a dangerous occupation exemption applies.
The dangerous occupation exemption requires certification by an actuary that the occupation is in the riskiest quintile (20%) of Australian occupations, being the occupations across Australia and not those specific to a Fund’s own membership.
There are many challenges with this carve out and Trustees have an overriding duty throughout to act in the best interest of their members.
The first challenge is the decision making process for a Trustee to determine whether to apply for the exemption, particularly for dangerous occupations. It is notoriously difficult for Trustees to know the occupation of all its members. Whilst Superstream has an occupation field for employers to complete, it is not mandatory and hence the Trustee may decide that, if it is not possible to accurately identify members with dangerous occupations, then the Fund cannot seek an exemption.
Even if a Fund can confidently identify dangerous occupations of its members, and that contributions are being received from employment in that occupation, there are still further considerations. As the Trustee is required to act in the best interests of all its members, it will need to review the value of opt out insurance and what changes to policy terms will achieve the most appropriate outcome for all members, considering risk and impact on premiums. Further, where premiums increase for any member segment as a result of applying for an exemption, Trustees will need to understand the impact on account erosion.
Funds will also need to continue to focus on member communication, to try to reduce the risk that a member in a dangerous occupation was missed, or misclassified as being in a dangerous occupation when they were not. This is a potential high risk area for administration errors.
The actual certification process is a new concept and will require some careful consideration. It is fair to say that data does currently not exist that meets the exact requirements of the Act. To assist actuaries in providing this certification, the Actuaries Institute (Australia) has issued an Information Note, which provides helpful information as opposed to actual guidance. Hence, there is still considerable variation in how the riskiest quintile may be constructed. Some examples of this are:
- Whether to consider death rates only, or rates of death and TPD combined. The legislation does not reference Income Protection, which many Funds additionally provide on a default basis.
- The Information Note suggests that the ABS occupation definitions (ANZSCO) provide appropriate categories, however, to achieve statistically credible data, the most granular level of occupations cannot be used. In any case, there will need to be a mapping exercise done to align a Fund’s occupations to ANZSCO data.
- The Act stipulates using information from the most recent 5 years; however, claims data often has a few years’ time lag to be collated and made available.
It will be a challenge for most Funds to think through and execute exemptions in time for the 1 April 2020 introduction of PMIF, given the need to communicate in advance with members. An exemption can be applied for at any time and, whilst this may therefore be a consideration that develops into the longer term, it is also important that Funds consider their strategy early.