APRA’s next focus – private health insurers’ governance, including executive remuneration
07/08/2017
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In a recent speech to the health insurance industry, Peter Kohlhagen, APRA’s Senior Manager, Policy Development indicated that APRA is commencing Phase 2 of the Roadmap to improving the prudential viability of health insurers: that is, a comprehensive review of matters relating to governance, including remuneration and board and director fitness.

Phase two is concerned with improving governance because a resilient insurer has robust governance arrangements designed to facilitate effective decision making in the long-term interests of the insurer. And processes to make sure that the right people are in place to support those governance arrangements, people who have the right skills, people who are competent and people who can be trusted to behave appropriately with other people’s money. Executive remuneration features in the latter.

APRA has in place existing cross industry prudential standards on governance matters – CPS 510 Governance and CPS 520 Fit and Proper – that reflect their experience supervising other institutions across the financial system. APRA anticipates that the principles underpinning these standards are likely to be appropriate to the private health insurance industry.

Moving on from risk management to focus on governance will give APRA greater confidence in the performance of boards and senior management to be able to identify, communicate and take action on potential risks facing an institution.

APRA’s review will include consideration of issues such as the independence of directors, their tenure, assessment and appointment processes, as well as expectations around board composition, board committee structures, remuneration structures and board-level engagement with APRA.

As part of the review of governance, APRA will consult on establishing a fit and proper prudential standard for directors, senior managers, auditors and appointed actuaries of private health insurers. APRA anticipates that the standard would be aligned with the provisions in APRA’s existing cross-industry standard on fit and proper – CPS 520. The key requirement of CPS 520 is for each institution to have a board-approved policy on fitness and propriety, and to assess the fitness and propriety of key executives and board members on both appointment and on a regular basis. And of course, where the rubber hits the road is the requirement that when a responsible person is assessed as not being fit and proper, the institution must take prompt steps to remove the person from their responsible position. This is likely to be a challenge for many of the very small not-for-profit PHIs.

Similar to their observations in other insurance sectors, APRA see a risk of complacency developing in the private health insurance space, which may lead to less than optimal risk management and governance practices in the industry. A tendency towards complacency can be a consequence of long periods of relative stability over the years, both within the industry and in the Australian economy generally. In this industry’s case, it could be a function of government controlled pricing that provides health insurers the necessary financial cushion they need to stay in business. APRA see complacency as the enemy of resilience.

APRA recently concluded a thematic review of risk management practices across all private health insurers. Findings from the review have been published on the APRA website in a letter to industry, and indicate that the private health insurance industry is in the early stages of its journey to building strong risk governance. In other words, health insurers generally have not been up to the mark.

Read APRA’s speech transcript HERE.

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