APRA Executive Board Member Suzanne Smith - Speech to the ICA conference 2024

Strengthening the foundations of insurance to navigate future challenges
 

Good morning. It is a pleasure to be here today, especially alongside my colleague ASIC Commissioner Alan Kirkland. 

The annual ICA conference is always a standout event, where we not only delve into the challenges facing our industry but also examine emerging solutions and innovations that are being developed. This year’s agenda promises to be no different. 

Backdrop & challenges

When we gathered here last year, we were still shaken by devastating natural disasters that profoundly affected our communities and the broader insurance industry. 

While the total value of claims may be lower this year, the rising cost and impact of more extreme weather events continue to strain the system.

Consumers have now faced multiple years of substantial premium increases, driven by the rising costs of these natural disasters along with inflationary pressures, increased re-insurance costs, higher building standards and advanced technologies, to name just a few. At the same time, insurers have felt the cost pressure and managed unprecedented volumes of claims, some of them - unfortunately - still outstanding. Alan will touch on this later.

Several inquiries and reviews have now been undertaken to understand the industry’s response to these events and we saw a high volume of submissions to the 2022 flood inquiry by insurers, consumers and other stakeholders. Extensive discussions have taken place, and deep analysis has been conducted, including reports by the ICA and the Actuaries Institute. All of these are welcomed.

What comes through loud and clear is that Australians continue to face significant challenges with the affordability and accessibility of insurance. Much more needs to be done to reduce the widening protection gap for consumers, who already struggle with the increased cost of living. 

Some progress has been made to address these complex challenges, and I would like to mention the private-public collaboration of the “Hazard Insurance Partnership”, where we have seen positive steps to address de-risking and mitigation with the intent of putting downward pressure on insurance premiums. 

APRA, in its latest corporate plan, has highlighted its intent to further partner with stakeholders to identify actions that support the access and affordability of household insurance. This includes considerations of broader data collections, potential changes to the prudential framework and assessing where changes to the climate pose additional risks to insurance affordability. This will be examined through the upcoming “Insurance Climate Vulnerability Assessment”.

Reducing the protection gap will take time, especially in view of wide-scale mitigation and de-risking measures, and we all need to continue the collaboration among industry, all levels of government and broader stakeholder groups to drive change. 

Now, I would like to turn to the more immediate changes that should be top priority for all regulated insurers in regard to core business operations over the next 12 months: the imminent commencement of the new prudential standards and regimes in 2025.

New standards and APRA’s focus

Strong core operations form the backbone of a sustainable insurance business and are vital to ensuring a vibrant and resilient industry. As outlined in APRA’s corporate plan, we expect you to manage your business effectively and adapt continuously to today’s rapidly evolving risk landscape. 

Your risk and governance frameworks need to be robust, and where weaknesses exist, APRA strongly encourages you to reflect deeply to understand the underlying causes and drivers.

The most immediate changes for the industry over the next year include:

Firstly, the commencement of the Financial Accountability Regime, or FAR, on 15 March 2025. At its core, FAR is focused on improving governance. This includes the implementation of the FAR framework for better risk governance and culture through imposing strengthened responsibility and accountability requirements.

Secondly, the implementation of cross-industry “Prudential Standard CPS 230 – Operational Risk”, commencing in July 2025. This standard is designed to strengthen the management of operational risk and increase entity resilience. This includes the consideration of underwriting agencies, claims managements services, and insurance brokers as material service providers, that should all have commensurate governance in place.

While much of this implementation should be well progressed, our work across the industry tells us that several critical areas still require attention.

Underwriting agencies

One example, that ties together the key elements across FAR, CPS 230 and broader governance requirements, is a focus for APRA over the coming year: the risk associated with outsourced underwriting to agencies. 

Partnering with experts to underwrite hard-to-place risks or to reduce operational and distribution costs can be a strategy. However, it is important to remember that the responsibility for core underwriting decisions always remains with the licensed insurer, as insurance risk and accountability are the very reason why insurers hold licences in the first place.

Strong governance practices are crucial here, including robust on-boarding and exit plans, elimination or clear management of conflicts of interest, adequate governance resources, and sound data security. This also extends to scaling operations, such as ramping up claims handling during a crisis. 

The key takeaway is that while authority can be delegated, the ultimate responsibility remains solely with the insurer. 

Challenges ahead 

Looking at the year ahead, the industry must embrace these regulatory and governance changes to ensure prudential soundness.

When your core insurance business is strong, you can then look at your services, whether it is improving the products you offer, educating consumers, fostering transparency, or providing greater support to policyholders. 

Insurers can, for example, do more to help policyholders to understand the factors driving premium changes and how they can influence their premiums through risk mitigation. Cultivating transparency to aid policyholder understanding should be a priority.

The insurance sector has been under significant scrutiny, following the reviews into the devastating flood events, the challenges associated with affordability and accessibility and the media commentary on insurers’ strong financial results of the latest reporting season. 

It is now critical for the industry to take these review findings seriously, act on them, and promptly implement necessary improvements. This will be crucial for a stable, reputable and trusted insurance landscape – one that protects our communities and helps our economy thrive.