COVID-19: How APRA has adapted to remote supervision

In March 2020, John Huijsen, APRA General Manager – Insurance, sat at his desk at home and surveyed his surroundings. He had no colleagues beside him; only his laptop and canine companion, ‘Cookie’. Just days earlier, APRA’s offices had closed due to COVID-19, and John’s team was suddenly working from home. John and his team had always relied on face-to-face interactions to effectively supervise insurance companies. So how, he wondered, would supervision take place now that APRA and its regulated entities were all working remotely?

Supervision

APRA’s supervision function seeks to protect the Australian community by identifying significant risks to entities and to the wider financial system, and to respond to those risks quickly and effectively. Until COVID-19 forced APRA and its regulated entities into working remotely, APRA’s supervision was carried out via direct, often face-to-face, interaction between APRA supervisors and entities’ staff. 

The job of APRA supervisors is to constantly monitor the state of their entity portfolio, to make judgments based on the level of risk an entity is operating with, and to apply a proportionate level of supervisory attention to ensure those risks are appropriately managed. To do their jobs well, supervisors utilise a range of tools, including analysing financial information and data submitted by the entities.

At the same time, an essential component of supervision is the need to regularly engage with a wide variety of people – including directors, CEOs and senior executives, operational staff, and risk and control specialists – from within the regulated entities.

One of APRA’s most effective and frequently-used supervision tools is the prudential review, where APRA supervisors examine one or more targeted risk areas, such as the claims management function of a general insurance company. Typically, these reviews are held on-site at the entity’s offices over a number of days. Such in-person engagements have been a key component of APRA’s supervision toolkit, and give both APRA and the entity the chance to discuss in-depth prudential issues and risks of concern.

The direct and personal nature of prudential reviews is very powerful, as it allows APRA supervisors to exercise judgements in response to behaviours exhibited by those in the room. Supervision is an art, not a science, and the in-person interaction helps APRA supervisors to get a better feel for the institution in order to assess an organisation’s culture, and to understand its dynamics of decision-making and accountabilities.

The impact of COVID-19

The onset of COVID-19 and the necessary work from home arrangements have meant that APRA supervisors cannot conduct prudential reviews and other physical face-to-face meetings. This displacement has meant that APRA has had to devise alternative approaches to supervision, particularly for those meetings that had been planned at the entity’s premises.

Like many other organisations, APRA quickly adopted remote working technologies and was able to shift to the demands of the new environment. However, many of the usual types of prudential meetings were deferred, and the primary supervision focus shifted to ensuring that entities could withstand the impact of COVID-19 (although sometimes meetings involved risks not related to COVID-19, such as reinsurance or climate change).

Phone and video meetings posed new challenges. Without the benefit of face-to-face engagement, supervisors needed to adopt a more formal structure and couldn’t rely on their usual, more free-flowing, dialogue. Not being able to read the "mood of the room" has diminished the effectiveness of some engagements – for both the entity and APRA’s supervision team. Yet supervisors still had to ensure the desired outcomes were achieved.

On the flip side, hosting such virtual engagements has enhanced APRA’s accessibility to people within entities. In the past, arranging prudential reviews – especially those that involved senior executives or directors – required extensive forward-planning to ensure the right people were available in a single location. The phone and video access to those working from home has reduced this obstacle, allowing many meetings to be arranged with short notice. 

New ways of operating have offered valuable insights into alternative ways of conducting supervision. Once COVID-19 subsides, APRA will continue to utilise virtual prudential engagements where it can effectively do so. However, the need for face-to-face supervision will remain, as there is no substitute for “eyeballing the institution” to glean what is really going on inside a company.

Internal focus

APRA’s move to virtual, video meetings in recent months hasn’t detracted from APRA’s collaborative approach to supervision. This is important, given that supervision doesn’t only involve frontline supervisors, but a myriad of others at APRA, including risk and data specialists, policy and technical analysts. Entity issues are usually not merely the domain of one team, so the need to share and discuss supervision approaches remains critical and has been facilitated effectively through video conference technologies.

John Huijsen, APRA General Manager – Insurance, and Cookie

Going forward

APRA is not the only regulator that has needed to shift with the COVID-19 disruption. As part of a domestic and global supervision community, APRA partakes in many regulatory forums – all of which are discussing and adapting to the challenges that the global regulatory community is facing, and sharing lessons and insights as things change.

“The COVID-19 crisis has forced APRA and its supervisors to do things differently,” says Sharyn Reichstein, Head of APRA’s Supervision Applications and Solutions unit. “We must ensure that we capture learnings as we go – both the good and the bad – and consider how they should inform our supervision approach going forward.” As such, APRA is currently undertaking an exercise to gather early insights from its experience of COVID-19 so far.

The exercise is broad-ranging and will also consider the impact on industry risks and structures, business models, and vulnerabilities of certain products (for example, travel insurance and business interruption insurance) or weaknesses in control frameworks, such as capital modelling or stress testing.

Although APRA supervisors will continue to be in the business of risk-based, forward-looking and outcomes-focused supervision, COVID-19 will undoubtedly produce new ways of supervising. 

As for John Huijsen, four months later he continues to work from home and is cautiously optimistic about his decision to return to the office two days per week. “I’m looking forward to a change of scenery and more variety in my daily interactions,” John says. “But I also recognise there are now many new and legitimate ways of working.” John’s perspective is based on the overall success of institutional supervision and internal meetings using technology, despite the challenge of assessing people and culture via a computer screen. John’s trusty companion Cookie will surely also need to readjust to John’s new ways of working.