APRA’s recent Insight publication brings us closer to understanding what is expected of RSE licensees on governance and oversight obligations for the provision of insurance, writes Sequential's Ruth Keaney.
In 2014, APRA was pleased with progress and there were pats on the back all round. Most of the industry had framework and policy architecture for SPS250 and enhanced trustee covenants of SIS Act.
It all sounded encouraging. So what’s changed in 2015? This time around, APRA has learnt through insurance thematic reviews across a broad range of RSE licensees.
APRA’s observations now range from a lukewarm ‘needs improvement’ to a downright frosty ‘needs significant improvement’.
The prudential regulator wants RSEs to demonstrate they’re taking this seriously and that they can tell the difference between compliance and effective risk management.
Funds need to do a better job of embedding stronger governance, and not just at a board level – APRA wants to see this on the shop floor.
So what were the key themes?
Governance and oversight – improving oversight of the ongoing operation of insurance arrangements and not simply making it an exercise at tender and renewal time.
APRA provide a more than helpful hint that they expect good practice to start with, independent benchmarking of all insurance arrangements.
Embed the IMF – They are calling out that “linkages between Insurance Management Framework (IMF) and Risk Management Framework (RMF) are generally poor”. The message they’re sending is to quite simply: get this done.
Underwriting – APRA are clear here, “substantial improvements warranted” and better linking to the IMF including clearer roles and responsibilities, and oversight of underwriting process.
Examples of good practice cited around reviewing complaints and declined decisions; they also call out the need to consider the impact of anti-selection and of practice of waiving underwriting medical loadings.
Claims data is the tea leaves that we can use to predict the underwriting future.
Administration systems – the common limitations in legacy systems again receive a mention. There’s passing recognition of enhanced access for members online, however while improved member access is great, I doubt it addresses the problem.
If systems cause funds and insurers to operate outside their own risk appetite, we need to investigate and quantify the loss and put in place minimum risk controls in the short term, just while technology catches up.
Claims – rates a much nicer mention this year, however similar to underwriting, there is plenty of room for improvement, particularly through the IMF and increasing oversight and monitoring.
The publication is APRA’s attempt to draw out good practice and I applaud them for trying, but in this case I suspect they’ve simply raised more questions and muddied the waters.
If you’re a CEO, COO, CFO, CRO or head of product, these are my five tips that you need to concentrate on to achieve a ‘pass’ or better from APRA next year.
Operationalise your IMF and risk framework
Identify linkages and align to the overarching risk appetite.
The issue here is that there is no industry standard to cut and paste, you will need to think strategically and I recommend looking outside the traditional life insurance industry for best examples. Global best practice is a good place to start.
Inspect what you expect
Independent benchmarking reviews of third-party arrangements and insurance providers are more than overdue.
This requires a benchmarking review across entire policy lifecycle, each member interaction, its timeliness, and effectiveness of claims and underwriting processes by all service providers.
This responsibility sits firmly in the RSE’s camp. These are your members, you need to be getting the best deal at the right price and on the right terms.
Review the underwriting value proposition
Considering the impact of more or less underwriting must happen. So must top to bottom identification and quantification of the potential resulting leakage.
So far this is a missed opportunity and APRA are spot on. If you bypass the front-end application and just focus on claims, you’ve missed the point.
I suggest looking more closely at the downstream impacts to increased member claims.
Product shouldn’t escape scrutiny and nor should the assessment of the occupational ratings allocation process; this is really the start of underwriting and where preventable leakage can occur.
From this targeted review, at a minimum there should be a business case to consider additional underwriting options that improve premium sustainability, and at the same time allow the fund to differentiate with personalised options and member choices based on affordability.
Targeting claims deep dive
It’s important to specifically call out the need to better identify more granularly claim trends and improve understanding of employer sectors and what drives a better or worse claims experience.
Yes we know the insurer data is sparse – but employer information is plenty. Reviewing the end-to-end claims lifecycle and targeting poorer performing employer funds is a great place to start.
This doesn’t mean simply start at claims notification, go back a few steps to properly understand the root causes.
Develop an insurance innovation framework
All funds need their own tactical and strategic plan. This helps operational, trustee and risk team’s learnings and can provide a roadmap of opportunities to hone skills and embed new practices and capabilities.
This practical framework calls for an approach that operates on multiple levels, blends traditional approaches, fund vision with incremental improvements supplemented with industry foresight and emerging trends.
At the same time, allows consideration of higher value activities and the measurable benefits to be gained.
These combined approaches through a structured framework can drive reinvention and bring a greater level of collaborative thinking and empowered decision-making.
APRA is clearer in 2015 of where they want RSEs and funds to look. The need to deepen insights and practices across risk culture, governance, and oversight including monitoring all third-party and outsourced arrangements is now defined.
There are challenges, but the opportunities and rewards outweigh them. Those that do this will set themselves apart and build stronger foundations to drive growth and sustainability. For those inclined to inertia, APRA will likely push further prudential guidelines to force your hand.
Seize the opportunity, tackle the big questions and you’ll be pleasantly surprised when the 2016 thematic review comes knocking at your door.
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