APRA seeks to grant actuaries greater powers

The Australian 12:00am September 29, 2017

Michael Roddan

The prudential regulator has proposed giving actuaries unprecedented access to insurance company boards, auditors and senior executives as it looks to put companies on the hook if they ignore the advice of their boffins.

The Australian Prudential Regulation Authority yesterday revealed a consultation package on cementing greater powers for appointed actuaries within insurance, life insurance and health insurance companies across the nation. The package of guidelines is an attempt to rectify years of mispricing and poorly managed risk in the industry, which has seen huge losses in life insurance, budget blowouts for natural-disaster cover and rising unsustainability in health insurance.

APRA is concerned senior executives had not taken seriously the advice of their actuaries, who help insurers assess financial risks when designing insurance policies and pricing. APRA member Geoff Summerhayes said appointed actuaries played a key role in protecting policyholders’ interests, but the effectiveness of the role been diminished in parts of the industry.

“These proposals are a significant step forward in putting the role on a sustainable footing and ensuring that appointed actuaries are able to make their important prudential contribution,” he said. “There is more that can and should be done by insurers and the actuarial profession to fully address the underlying causes of the issues observed by APRA.”

Under the proposals, appointed actuaries would develop a framework that a company would have to abide by to follow their advice, and APRA would require the boffins to have the “necessary authority, seniority and support” to influence the strategic direction of senior executives.

The rules would see actuaries writing reports on the financial condition of insurers, which would be submitted to APRA. Insurers would be beholden to provide the actuaries with huge amounts of access to company committees, internal auditors, external auditors, senior management and others if requested by the actuary.

The actuary would advise companies on the value of their liabilities, the adequacy of their risk charges, the level of capital held and the calculation of stress-tested models.

If the insurer does not accept the advice actuary, the insurer “must notify APRA on or before the day that the insurer’s annual regulatory financial statements are required to be submitted to APRA”, the guidelines said.

Speaking at the Actuaries Institute’s forum when the regulator released a discussion paper on the new proposals, APRA’s diversified institutions general manager Adrian Rees said a high turnover rate for actuaries and a trend to much shorter tenures for executives and managers meant companies were losing valuable experience.

APRA had also found many instances where actuarial advice was not followed.

Annual profit across the life insurance industry sank to its lowest level in three years in early 2017 following a huge jump in claims costs. Insurance claims have continued to rise as consumers become more aware of their benefits, but media focus on the sector following scandal involving claims handling at Commonwealth Bank’s life insurance division CommInsure contributed to an industry-wide blowout in claims.

More recently, questions have been raised about the sustainability of disability income insurance, which has struggled to stay profitable amid a deluge of mental-health claims.

While insurers have bled cash, policyholders have seen extreme rate rises. Research by Rice Warner found life and disability insurance premiums climbed 215 per cent in four years and income protection premiums jumped 82 per cent.