Staff Turnover Impacting Insurance Sustainability

The short tenure of life insurance executives is contributing to the industry’s sustainability woes, the Australian Prudential Regulation Authority has warned.

APRA Deputy Chairman, Ian Laughlin

APRA Deputy Chairman, Ian Laughlin

Addressing the Actuaries Institute in Sydney, APRA Deputy Chairman, Ian Laughlin, said that one of the reasons the industry continued to experience periodic bouts of poor financial performance was because senior management was not learning from the mistakes of the past.

Mr Laughlin said the current issues faced by the life insurance industry were not new, but that they often took a long time to materialise. The impact of adding new benefits without repricing, for example, was something that was often not felt until well into the next decade, Mr Laughlin said.

This presents a challenge in itself, according to Mr Laughlin, because “…the management team in place when (poor) experience emerges is often different to the management team that made the many and various decisions that led to that performance”.

He noted that senior management, including CEOs and Appointed Actuaries, moved between insurers more frequently than in the past, and questioned whether current remuneration arrangements were appropriately geared towards retaining staff.

…the management team in place when experience emerges is often different to the management team that made the decisions…

“Corporate memory is also impacted by this turnover, and this is exacerbated by risk business specialists moving to another insurer before the fruits of their work have matured. True underlying experience (particularly when it is poor) can take years to emerge – and then sometimes shows itself quickly as the inadequacy of reserving and pricing is realised and corrected,” he said.

“An argument can be made that absent a change in approach to the management and governance of life risk insurance, we can expect ongoing intermittent periods of poor experience over and above those purely generated by economic cycles.”

One solution, which Mr Laughlin cautioned was not the only approach to managing risk, was to build management goals around the principal of the long term health of the portfolio of risk business.

He suggested insurers might consider a primary mandate for senior management along the following lines:

  • To maintain a healthy life insurance portfolio over the long term (ie: a term which goes well beyond the tenure of incumbent management), and
  • To hand that portfolio over to their successor in better health than when they inherited it

“This primary mandate does not preclude other management objectives (such as growth or market share targets), but it would mean that any such other objectives should not compromise the primary one above,” Mr Laughlin said.

Mr Laughlin made similar comments at last year’s Financial Services Council Life Insurance Conference, pointing the finger at product managers who added benefits and features simply to achieve higher ratings house scores (see: Insurance Sustainability Threatened by Product Enhancements). The 2015 FSC Life Insurance Conference will be held on Thursday 26 March in Sydney. As a media partner of this event, riskinfo will be live tweeting from the event, and will provide you with an analysis of the key outcomes and topics in our news bulletin.