Hello everyone. It is a pleasure to be part of the ICA conference again this year. I am disappointed that, due to other APRA commitments, I am not able to be there in person.
Let me start by concurring with the comments made earlier by Karen Chester on the vital role the insurance sector plays in supporting the needs of the community and contributing to financial system stability. Many of the themes that Karen touched on are aligned with APRA’s key areas of focus.
The past three years have been incredibly challenging for the insurance sector. The devastating bushfire season of 2019/20 was followed by the COVID-19 pandemic, which exposed some concerns with how insurers manage risk. The uncertainty that arose around business interruption (BI) cover and claims, and related legal action, had the potential to seriously undermine insurer balance sheets and consumer confidence. And with the seemingly relentless rain this year, the eastern states all currently experiencing flood events, and a rather gloomy macroeconomic outlook ahead, insurers may be forgiven for feeling a little battered themselves!
But as with any difficult situation, there is also opportunity. Now is the time for insurers to step up and continue to demonstrate their value to the Australian economy and community, by responding positively to the opportunities that lie ahead and making the changes needed to ensure they are fit for the future.
In that context, today I want to briefly touch on three themes:
first, the important role of insurers in contributing to solutions to improve insurance affordability and availability;
second, the need for strengthened risk management practices across the end-to-end product management lifecycle; and
third, the need for more investment in innovation and different approaches, to ensure insurance products and operating and business models are fit for the future.
Of course, these three themes are very much inter-related, and action on all of them is needed to ensure that the insurance sector continues to be able to sustainably provide insurance that meets evolving consumer needs and expectations in an uncertain and rapidly changing environment.
Natural disasters and insurance affordability and availability
Let me start with the first of these three themes.
We all know that Australia is a land of unpredictable weather events and – for better or worse - insurers are well practiced in responding to them. By and large, claims are honoured within reasonable timeframes and reinsurance protection holds up.
For the east coast weather events that occurred earlier this year, over half of the $5.4b claims have now been paid. This is reasonable progress given the significant complexities and challenges that have been involved, including supply chain problems and the need to work with policyholders and other stakeholders as government buybacks, cash settlements, housing relocations and other recovery and response initiatives have been developed and implemented.
The industry has responded well to these events, in heartbreaking circumstances for those impacted, with extensive community engagement and an observable, genuine effort to assist, advise and support their customers. But as Karen has noted, there is room to do better to ensure that claims – across all lines of business – are dealt with as promptly as possible.
There has been a financial impact on insurers from the events, with natural catastrophe allowances being exceeded, however capital resilience has been strong, and insurers remain profitable and able to meet their commitments to policyholders.
But increasingly, the affordability and availability of insurance for many consumers in areas exposed to heightened risk of natural disasters is reducing and this needs to be addressed. This is an area where APRA continues to focus, given our role under the Insurance Act isto protect the interests of policyholders in ways that are consistent with the continued development of a viable, competitive and innovative insurance industry. And insurance being too expensive or simply not on offer is a poor outcome for consumers, the insurance industry and the wider economy.
The answers to the challenge of insurance affordability and availability are not simple and require many stakeholders to come together to tackle the problem. And that is occurring. APRA and ASIC are actively engaging with the ICA, and with Treasury and other stakeholders, to develop a deeper understanding of the scale and scope of affordability and availability issues, and possible options to address them.
One of the most impactful actions is, of course, mitigation of the risk, and it is pleasing to see governments and relevant agencies having a greater emphasis on, and increasing their investment in, mitigation and other actions to improve disaster resilience.
Improving data, for example in relation to geographical areas that are more vulnerable to the impacts of climate change, is another important limb, and where we can leverage the insurance industry’s relatively advanced data and climate modelling capabilities.
Enhancing insurance data is a key part of APRA’s multi-year data strategy, as outlined in our recent Data Directions paper. Better, more granular insurance data will help APRA and other stakeholders analyse trends and developments, for example in premiums and claims across multiple product lines, to help identify where we need to move the dial on affordability and availability and how we might achieve it.
APRA and ASIC have formed a joint data working group and will soon embark on a program of industry roundtables to discuss our proposals. We want to hear from you in this process, to help us develop a rich data set that will better serve the needs of APRA, ASIC, industry and other stakeholders. Yes, the industry will need to submit more data, and this will require investment and effort – but we expect significant benefits to be realised for all stakeholders over time.
While we acknowledge that the challenges are not for insurers alone to solve, the industry does need to consider what more it can do to improve insurance affordability and availability. We are certainly not suggesting insurers cover risks they cannot effectively price or manage (from a capital or balance sheet perspective). But there are steps insurers can take to review the design and management of their products to improve affordability and availability for policyholders.
We are seeing some insurers make policy design changes to better meet the needs of certain market segments, for example with the use of parametric triggers for determining claim payment thresholds to improve certainty and timeliness of claim payments. But there is more that can be done.
Increasing transparency on product terms and conditions, for example, as well as pricing to incentivise investment in risk mitigation will be critical. Policyholders and wider stakeholders will need to be able to see that the actions they take to reduce risk are flowing through to lower premiums than they would otherwise pay.
Strengthening insurance risk management practices
While insurers traditionally step-up in a crisis, we have seen in recent years that many have been found wanting in how they manage their insurance risk exposures, in some cases leading to poor customer outcomes.
This leads me to a key focus area for APRA in the past 12 months – the fundamental issue of insurance risk management. As you would be aware, in 2021 APRA asked 10 insurers to comprehensively review what went wrong with respect to business interruption insurance and remedy their insurance risk management frameworks to avoid a repeat of the problem. We also asked them to apply that lens to cyber risk exposures and other lines of business where similar vulnerabilities may exist.
The exercise has since been completed, and we released our broad findings to the industry last week. As expected, insurers identified multiple weaknesses in their risk and control frameworks. APRA has provided detailed feedback to the insurers that participated in the process, and all have embarked on programs to address the findings.
The problems were not isolated to sloppiness with outdated policy wordings. This was a very basic error, but other more fundamental issues were also exposed. Key themes included miscalculation or ignoring of the potential materiality of the risk associated with the pandemic, a lack of willingness to escalate matters of concern, and complexity in policies and systems. Multiplicity of policy wordings was a real problem, especially in the SME market where third-party distributors were utilised. In some cases, competitive drivers overrode sound underwriting discipline. These issues speak to more holistic weaknesses in risk culture.
It is important that insurers heed the lessons from this review. APRA will be closely monitoring to ensure insurers make the improvements they have committed to, and is prepared to adopt stronger measures if we don’t observe good progress.
I also urge those who did not participate in the exercise to consider conducting a similar review across their own products and portfolios. With the added lessons from the attention to pricing frameworks outlined earlier by ASIC, it is important that we see a significant and enduring uplift on risk management across the industry.
Investing in innovation to drive change
Which brings me to my third theme - the need for investment in innovation and different approaches, to ensure insurance products and operating and business models are fit for the future.
Tackling insurance affordability and availability, delivering the needed uplift in insurance risk management practices, and supporting operational resilience requires investment in simplification across products, systems and processes. It also needs new and different approaches to those that may have been adopted in the past, rather than continuing to do the same thing and expecting a different outcome. While we have seen some green shoots of innovation, and investment in improved systems and processes, more is needed.
As the environment in which insurers are operating shifts, the risks they face evolve and customer expectations and needs change, it is more important than ever that insurers also adapt and change so that the industry can continue to play its important role for the Australian community.
While APRA acknowledges the challenges facing the industry, we make no apology for pushing you to do better and learn from the past.
It is in all our interests to have a strong and innovative industry delivering needed protection for all Australians.
Achieving an appropriate balance between the financial health of insurers and access to affordable and well-designed insurance for policyholders is not simple – but it is of great importance for the Australian community. So, we all need to do our bit and work together to achieve it.
I hope the conference is a great success and thank-you again for the opportunity to address you.
The Australian Prudential Regulation Authority (APRA) is the prudential regulator of the financial services industry. It oversees banks, credit unions, building societies, general insurance and reinsurance companies, life insurance, private health insurers, friendly societies, and most members of the superannuation industry. APRA currently supervises institutions holding $8.6 trillion in assets for Australian depositors, policyholders and superannuation fund members.
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