The new emphasis by ASIC on culture in the insurance industry
On consecutive days in late May, senior representatives of the Australian Securities and Investment Commission presented papers to the industry on why culture matters and more importantly why culture must be emphasised by the industry’s leadership. These presentations are part of the current review ASIC has commenced on industry practice. ASIC, by letter on 18 April, requested the industry commence a review of their claims procedures.
The Australian Prudential Regulation Authority followed up on ASIC’s lead by writing to the management of life insurers and asking them to consider their governance procedures around claims, updating and reviewing definitions within policy wordings and whether their process for dealing with customers is adequate.
Why have the regulators taken it upon themselves to emphasise culture at this point? It is clear that ASIC and APRA feel that the industry has not properly responded to some of the issues facing it and that, furthermore, recent events in the industry have demonstrated, at least superficially at the public level, the industry has failed in its dealings with the public.
A consequence of this emphasis on culture by ASIC will be that senior management, including the respective board of directors, must determine what is the appropriate path forward to ensure that they meet and exceed ASIC’s emphasis on culture.
ASIC has defined culture in their presentations as a set of shared values or assumptions in the mindset of an organisation. Culture is the unwritten rules that govern how things actually work. Given that the regulators have been strong proponents of principles based regulation, supported by documented internal policies, we surmise that their renewed emphasis on culture is based on a belief that the industry has room for improvement on the development of a client friendly culture.
In a speech by George Medcraft, Chairman ASIC, he stated ASIC was concerned about culture because it is the key driver of conduct within the financial industry.
“Poor culture inevitably leads to poor outcomes for investors and consumers and impacts on the integrity of the Australian financial markets and erodes investor and consumer trust and confidence. Ultimately, this has flow-on effects on the Australian financial system and broader economy.”
ASIC has also been clear that despite its focus on culture it does not see, nor want, the role of regulating culture, but they are incorporating consideration of a Company’s culture into ASIC’s risk-based surveillance reviews.
So how should the industry respond? We suggest that the obvious first step is by assisting and responding in an open and transparent manner to both ASIC and APRA’s requests for self analysis and review. Furthermore, the industry’s embrace, through the leadership of the Financial Services Council, of the development a life insurance code of practice is further evidence of the development of a greater consumer based focus and culture within the industry. Finally, each individual participant in the industry must look within to determine in what way can it alter or enhance its culture to avoid poor outcomes for its clients.
A failure within the industry to implement a stronger client friendly culture could result in regulated changes caused by political responses to public mistakes by the life insurance industry.
Written by Mark Kimberley, Partner.