RBNZ: Insurance sector must evolve in line with increased public expectations and changing risks

Adrian Orr, Governor from RBNZ delivered a speech at the Insurance Council of New Zealand Conference today about building confidence and reducing risks in the insurance sector. You can read his full speech here.

Here are some key points that I really enjoyed:

  • There are significant information-asymmetries between an insurance provider and their customer, and the risks of providing poor or outdated information run in both directions. ‘Who is good for what, and when?’.
  • ...often there is a long period of time after a customer-relationship has been established. In very difficult circumstances, a customer may find that they do not have the coverage they believed would be available to them. And, on the other side of the ledger, insurers rely on accurate information from customers about their own circumstances.
  • Orderly and well-articulated changes in insurance and pricing strategies are needed, so that all participants in the financial sector – and wider economy - can adapt their behaviour without creating unintended outcomes.
  • How a firm monitors and addresses conduct and culture issues will be a part of our ongoing ‘business as usual’ supervision with all insurers. We will also monitor insurers to make sure their planned actions are implemented effectively.
  • The public is demanding that both insurers and regulators play a part in providing greater confidence in the health and conduct of the sector. The Reserve Bank’s insurance agenda for the coming year (or years) is thus very full.

The section on three disciplines, which is too big to quote, is also well worth a look.

I liked the comment about changes in insurance and pricing strategies. I think that this is probably about the more visible marketplace - general insurance - and the role it has in affecting decisions that people make about where they live and the buildings in which they live, and also what buildings get built and where. But it could equally well apply to the marketplace for income protection too, which is in a product design and pricing crisis that has some similar features to insuring buildings in earthquake and flood prone areas. Both life and property insurers have efficiency challenges. The point about information asymmetries cannot be made strongly enough and needs to be remembered in the insurance contract law review process. It is a comfort to insurers (and should be to consumers as well, although they don't tend to be) that officials are signalling that they understand these fundamental concepts. 

 


Introduction to advisory boards course


While necessary, it is no longer enough to have processes in place…

While necessary, it is no longer enough to have processes in place to identify and deal with problems - such as monitor for and apply a management plan when a problem is identified. Instead, to obtain a license, it is now necessary to be able to state and demonstrate how one is actively working good processes and monitoring to ensure that there are no problems, and then regularly report and record that fact at the appropriate level within the entity.

That’s why so much compliance work is focused on recognizing conflicts, creating appropriate processes, and then setting up controls and monitoring. Good governance is more than effective management, but it entirely supports and facilitates effective management.

Business, by definition, is not a solo activity. Governance, more so. I don’t think effective governance can possibly be performed by one person either. It’s essence is checks and balances, requiring a perspective bigger than any one individual. If you’re scared of letting go of all the control you have as ‘the boss’ you need good governance more than most - and it will be harder for you to achieve it. But here’s the key, if you’ve ever been frustrated at your ability to get your business to change in the way you want, good news: good governance is exactly the tool you need to use.