The Financial Planning Association (FPA) has backed standardised terms for default MySuper life insurance policies, arguing that to do otherwise would only risk further confusing consumers.
What is more, the FPA has warned that in circumstances where consumers are inclined to choose the cheapest products, care needs to be taken to avoid a “race to the bottom” by insurers.
In a submission filed as part of the Federal Treasury’s consultations around Universal terms for insurance within MySuper, the FPA warned however that the Government needed to be careful to ensure that the desired outcomes were achieved and that flexibility was not removed.
“The introduction of standardised terms and definitions has the potential to make it much easier for consumers to compare products by removing some of the major variables that currently exist across the various life insurance products available through MySuper,” the submission said.
“Currently there are significant differences in the definitions of terms, exclusions, conditions, and other product features, making it almost impossible for anyone to conduct a like-for-like product comparison. These differences in product features result in large differentials in premiums,” it said.
The submission said that, when combined with the fact that insurance was an extremely complex product, this could influence the design of insurance products, and lead to a ‘race to the bottom’ to increase sales, as consumers commonly chose the lowest price product, which might not provide the cover they needed or that they believed they were purchasing.
“Consistency in terms and definitions would assist in overcoming this issue,” it said. “However, the FPA suggest consideration be given to ensure there would be no unintended consequences for some consumers from the introduction of standardisation of terms and definitions, such as a reduction in cover.”