The Australian Prudential Regulation Authority (APRA) has pointed to the meagre profits that group risk insurance in super has contributed to the risk insurance industry as evidence that insurers need economies of scale.
APRA's annual report claimed only 10-20 per cent of the profits from the risk insurance business came from group risk insurance.
"The fact that this business delivers only about 10 to 20 per cent of the profits from risk insurance business confirms a narrowing of profit margins and illustrates the importance of economies of scale for group business," APRA Chairman John Laker said.
Group risk insurance had grown to one-third of the risk insurance business in Australia, he said.
Laker said many smaller insurers, particularly those with little brand exposure or distribution capabilities, had targeted the superannuation industry as a way to build market share – but the operations of some of the smaller players was of concern.
Insurers needed to build and manage large volumes of group business from a wide range of customers in order to ensure diversity and robustness, according to Laker.
"Prudential risks associated with the capital support, operational management and pricing processes for group risk insurance have been of concern to APRA for some time," he said.
He said the Stronger Super reforms were an opportunity to clean up practices, as they put the onus on trustees to ensure that members were matched with the best insurance offer available.
"New prudential standards and guidance will sharpen trustees' focus in this regard," Laker said.
