APRA Deputy Chair Helen Rowell on poor insurance risk management

Focusing on the insurance industry, Rowell delved into:

Insurers, just like mountaineers, are in the business of risk;
Insurers may be in the business of risk, but they are not immune to poor risk management;
Many of the risk governance challenges facing the insurance industry are echoed across the financial services industry.

Rowell advised the Australian insurance industry to maintain a firm footing between remaining commercially viable and keeping coverage accessible and affordable for consumers, despite facing significant risks.

“[The insurance industry] needs to do this in the face of intensifying competition, evolving customer demand, and an uncertain economic outlook,” Rowell said. “It’s a time of challenge and uncertainty for the industry. A time when strong risk governance is critical. And yet, as I alluded to before, some of the most recent high-profile examples of poor risk management have been in insurance.”

Read more: APRA publishes life insurance figures for June 2022

Rowell also delved into the life insurance industry’s individual disability income insurance (IDII) market, currently deemed complex and highly competitive.

“Generous insurance benefits at competitively low prices might sound like a good outcome for consumers. But it couldn’t last. The reality is that this unsustainable approach has led to substantial losses for the industry and, ultimately, significant premium increases for policyholders. Left unaddressed, the viability of the IDII product – and the protection it offers Australians – would be at risk. It’s what you might call a lose-lose scenario,” she said – adding that some of the past poor market practices, such as having more generous product features in pursuit of sales rather than ensuring product sustainability, may be resurfacing in the Australian IDII market, putting the viability of this significant product in jeopardy.

APRA has also noticed worrying signs of similar trends and practices in other life insurance markets, such as group insurance. As a result, the regulator expects boards to drive real and sustainable change in the market and insurers to influence other market participants to focus more on long-term product sustainability.

Rowell also delved into the Australian business interruption (BI) insurance sector, which has faced various class action cases since the COVID-19 pandemic began.

“Following the COVID-19-related lockdowns and disruptions, general insurers were inundated with business interruption insurance claims. Unfortunately, it soon became apparent that many insurers had failed to keep the wording of their policies up to date with changes in legislation,” she said. “This was a significant lapse in risk management which created uncertainty for policyholders, at their time of greatest need, over pandemic coverage under BI policies. It also put insurers at risk of legal disputes and significant financial exposure.”

As a result, APRA conducted a review to ensure the industry learns its lessons from what occurred since the pandemic began, understands the root causes, and takes action to avoid repeating its mistakes.

“The objective of the review is to ensure that insurers are effectively managing the end-to-end insurance product lifecycle – including product design, pricing, distribution, compliance, and claims management – for the benefit of both policyholders and the insurer,” Rowell said.

Rowell vowed that APRA will work closely with insurers, banks, and superannuation trustees to improve their risk management practices and strengthen risk frameworks across the financial sector.