The role of actuaries in APRA regulated insurers: non-financial risks

In a recent speech Deputy Chair John Lonsdale discussed APRA’s new cross-industry standard, CPS 320 Actuarial and Related Matters, which comes into effect on 1 July 2019. APRA is introducing this standard to strengthen the influence of the Appointed Actuary in general, life and private health insurers.

He argued that actuaries cannot limit their considerations to traditional financial risks, given the substantial damage to prudential soundness that can arise from the poor management of non-financial risks.

He pointed out that if non-financial risks are left unaddressed, the consequences become financial in nature. The cost of remediating aggrieved customers and upgrading or putting in place systems to stop it happening again can have a material impact on profits.

Mr Lonsdale said:

“With financial sector trust damaged, it only takes one media exposé or social media outcry to cause a company serious financial damage, often in the space of days or hours, rather than weeks or months. The consequences of failing to properly identify, assess and mitigate risks, especially non-financial risks, are higher and potentially more expensive than they have been for many years…

A reflexive reaction may be to argue that we’re asking actuaries to go beyond their training and expertise. That’s not the case. APRA doesn’t expect actuaries to be running their eye over marketing campaigns, signing off on board appointments or conducting staff surveys seeking signs of a poor culture. We understand that actuaries are focused on numbers, but numbers can tell a story beyond simply profit or loss. If a particular policy that your insurer sells pays out less than 20 cents in the dollar of premium raised in claims, what does that suggest to you about the value for money that policyholders are getting? If your life insurer is taking an average of eight months to pay death cover claims, or accepting only one in four total and permanent disability claims, does that raise alarm bells for you? We don’t expect actuaries to always know what the precise story behind the numbers is, but we do believe they need the nous to recognise there may be a problem, and the courage to push boards and senior executives to examine and address it.”

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