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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.

  • Alleycat

    Mr Laughlin has hinted at a symptom but obviously has no idea about the cause.

    I could name a number of senior executives and middle management in Life companies today that the best you could say about them to be kind is that they are mediocre.

    The real cause of the malaise that plagues life companies is that mediocre management breeds mediocrity right down the line.

    There’s a classic case of xyZ company where the management is a best incompetent but manages to survive without any changes, to where it matters.

    If this is the measure of what exists in the industry, is it little wonder we have a regulator commenting on the symptoms but has no understanding of the cause.

  • John

    I firmly agree with the points expressed
    Having joined an Insurer upon leaving High School I was privileged to receive
    extensive training over many years
    The training was by career personal who were part of a Family, not just employees
    We felt wanted and secure and called our executives our friends.
    This is totally lacking these days – a great pity
    Our Actuaries were well known and respected and products were nowhere near as complex and Governments did not fiddle with Superannuation each year
    After 50 years in the business I just sit back and wonder what new obstacles will be put in our way and how much money is wasted on all these Rules and Regulations when there is no one smart enough out there to apply or enforce them.
    In the good old days new Agents were constantly supervised and trained in the field – perhaps, if some smart Dealer groups were to insist on this and have personnel in place some of the silly errors would no result in ASIC punishment
    Enough said

  • JW

    More telling our industry how to suck eggs.
    This industry has been built over a long period of evolution. It found a balance of what worked and was fair for all parties. External parties have stuck their nose in (Fofa) and what has been discussed in this article is the tip of the ice berg of emerging problems.

  • Jacquie

    We really should differentiate between retail and group life products and group life products within superannuation. Group life in super is a very simple product with few product enhancements and generally low sums insured. Its a very competitive space and the insurers fight hard to win tenders for premiums worth millions. The pressure has always been on the insurance company actuaries to provide the best price. Due to regulatory limitations a life product in super is very simple. Product managers in the group life space and particularly the group life in super space can really only tweak the product i.e. tighten up policy terms. We really should be careful about apportioning blame to any one group for the current sustainability issues. Anyone who has worked for an insurer knows that the pricing, product, underwriting, claims, legal, compliance and trustee all decide and sign off on the product offering.

    Retail life products are different again, these are enhanced and upgraded twice a year with more and more complex terms and features and this is probably to justify ‘churn’.