APRA head calls for life insurance rethink

One of the insurance industry’s most senior figures says the life insurance industry must fundamentally change some of its practices for face a future riven with poor performance and uncertainty.

APRA Deputy Chairman Ian Laughlin used a speech at the Actuaries Institute earlier this month to challenge the industry to change the way it is run.

Laughlin pointed to the industry’s consistent poor performance since 2008, which he says clls into question the industry’s ability or intent to address the causes of the problem.

The industry has seen previous periods of poor profitability (particularly with disability business), and this suggests the industry may not learn from its own past mistakes,” he says.

He says APRA has observed a number of practices that do not meet the standards of fundamental good practice in insurance management and are very likely to contribute to poor performance.

“They include product features added at no cost or with little analysis of impact, definitions that are open to interpretation or prone to obsolescence, various basic problems with underwriting and claims management, and a lack of information to support proper analysis,” he says.

To improve matters, Laughlin suggested an eight-pronged approach for life insurers and reinsurers to take:

  • Get the basics right, by honestly or independently assessing the state of their data, underwriting, claims management capabilities and products,
  • More closely monitor the accumulation or risk and uncertainty, by maintaining detailed histories of internal and external forces that could impact profitability,
  • Clearly articulate their risk appetites, making clear the limits of volumes of particular products,
  • Ensure their risk management framework is comprehensive and effective in dealing the risks associated with the long term health of a life risk portfolio,
  • Support the risk management framework with an appropriate risk culture,
  • Create a dashboard of statistics on the portfolio’s health, including metrics such as short term and long term profitability, broken down by product and product feature/definition, by policy duration and by applicable underwriting conditions,
  • Recast remuneration performance measures to focus on rewarding actions that benefit the long-term health of the portfolio, and
  • Lock in strong and effective governance structures, to bridge over staff turnover and ensure the above points are maintained.