Insurers follow banks into new era of regulation
There has been much media coverage and profile in recent months over banking regulation – the debate over additional capital requirements post-GFC at both Australian and global levels is still raging. Considerably less attention has been paid to the insurance industry – yet there are similar challenges affecting the sector, and given recent rises in premiums in many fields of insurance, increases in regulatory requirements for insurers should be considered carefully – for inevitably additional costs affect bottom line and hence prices charged to consumers.
There are indeed significant developments, which signal major changes for the industry – but leading practitioners and group chief risk officers spoken to by KPMG globally in recent months are concerned that regulators will not be able to deliver reform. KPMG has just issued a report Evolving Insurance Regulation which provides a comprehensive review – including from regulators themselves – of the impact of recent actions by the International Association of Insurance Supervisors (IAIS) and other key players.
One of the key concerns uncovered by the report is the interplay of global and national regulators – again echoes of the banking debate. There is clear uncertainty on how the Insurance Capital Standard – our version of the Basel banking framework – and the establishment of the Insurance Core Principles (known as ComFrame) may coexist alongside local requirements and whether these new global standards will require changes to local solvency requirements. This is a particular issue for APRA who have higher capital requirements than other jurisdictions.
There is a general groundswell in the industry for greater international consistency and harmonisation of insurance requirements but also considerable uncertainty whether this is realistic. A lot more dialogue is still needed.
So what is the impact on Australia?
Australia does not have any players which qualify as global systemically important insurers (G-SIIs). But our domestic systemically important insurers (D-SIIs) will be affected by increased regulation. I believe that the major and highly specialised Australian insurers may be required to hold higher levels of capital in addition to undertaking recovery and resolution plans – again in line with the approach for the banking sector, which focused on the need for higher loss absorbency and recapitalisation capacity.
Another key development is the APRA requirement for the introduction of a Chief Risk Officer (CRO) role into major insurers. This adds further pressure on Australian insurers to demonstrate the adequacy and effectiveness of their risk management framework.
It should be noted that these Australian requirements are world leading. APRA is ahead of its other global supervisory counterparts in mandating a formalised CRO role and this will continue to have cost and resourcing implications for Australian insurers. As part of these measures, Boards are now required to form a view regarding risk culture within their organisations to ensure alignment with the risk appetite strategy and the broader risk management conducted throughout the entity.
This is a considerable step-change for most insurance boards which must now be able to demonstrate that all staff understand and abide by the risk management framework relevant to their areas of responsibility.
Aligned with these developments, regulators are also changing their approach. They are increasingly moving towards a forward-looking, proactive and judgment-based supervisory approach, with increased focus on consumer outcomes.
This means that regulators such as ASIC and APRA are not just interested in the control environment, but also in firms’ business models and strategies – for example, consideration of key drivers of profit and whether consumers are being treated fairly in the sale of these products.
I expect to see a considerable increase in such focus over the next 12 months from the Australian regulators, particularly the drivers of conduct risk which will place further pressure on senior executive and management to respond accordingly.
The regulatory developments should also be seen in the wider context of unprecedented change in the insurance sector.
Over the past decade, the pace of change in the insurance sector has been exceptional, with new models, competitors, and technologies all combining with additional regulation to impact insurers around the world. All signs seem to indicate that this pace is only going to increase in the future, particularly in regards to disruption and innovation in the Australian insurance industry.