APRA recently provided an indication of what it expects of insurers on executive pay. You might think that the pressure on margin requirements and the recent catastrophes would cause APRA to make allowances for complaints by the boards that they were suffering regulatory overload. But you would be wrong. APRA’s position on the issue is that it is the management’s responsibility to help ease the load on the board by providing clear, relevant, and targeted information that can be easily understood by directors not working in the industry.

This was made clear by APRA’s Helen Rowell, Executive General Manager, Supervisory Support Division, at the Insurance Council of Australia Regulatory Update on 22 February 2012.

In April 2010 APRA introduced new requirements in relation to remuneration (see HERE). The requirements aim to ensure that regulated institutions’ remuneration arrangements promote prudent risk-taking in the management of their business, and that there is effective governance of remuneration matters.

Since then, APRA’s supervision teams have monitored progress on implementation as part of their normal ongoing activities. APRA recently met with the Board Remuneration Committees of a group of institutions to discuss the manner in which they provide oversight of remuneration arrangements for senior executives and how policy is translated into practice.

From its discussions, APRA identified a number of issues warranting further consideration and has requested that all ADIs, general insurers and life insurers consider whether improvements could be made to current remuneration policies and practices. Some of the issues to consider that were noted in a letter recently sent to most ADIs and insurers were:

• Is the Remuneration Committee well-established, with clear governance arrangements?
• Are there strong linkages between remuneration and risk management oversight by the Board or its committees?
• Is the primacy of the Board in setting remuneration arrangements for relevant staff well understood and recognised in practice?
• Do KPIs adequately reflect potential risk-taking by an individual as opposed to the wider management team?
• Is the Remuneration Committee satisfied that appropriate weight is being given to risk-related KPIs?
• Is the quality of risk management explicitly taken into account in the KPIs?

The Insurance Act imposes primary responsibility for protecting the interests of policyholders on the directors and senior management of general insurers. Ms. Rowell said that given the critical role of the board in protecting policyholders’ interests, APRA places obligations on all insurance company boards through its prudential standards.

In her speech, Ms Rowell commented that feedback from boards is that APRA is expecting too much of them – that they’re being over-burdened with regulatory requirements and that APRA is confusing the role of the board with that of senior management. Ms. Rowell disagreed.

Ms. Rowell’s argument focused on management’s responsibility to assist the board and the board’s reliance on management, rather than the board having to work harder. Her speech seems to imply that APRA believes directors’ complaints of overburden is the result of lack of insurance industry experience by directors and that the excessive burden would be lifted if the management gives them access to information that is targeted and easily understood.

Ms. Rowell suggested that “APRA’s prudential standards empower boards because they give a frame of reference for good practice. Boards rely heavily on management in many ways, apart from the obvious one of running the business. Management has an obligation to recognise the difficult role the board has and to make it as easy as possible for the board to meet its responsibilities. Management can have a great influence on the board’s priorities and on the way it performs its role, and ultimately on how well it meets its regulatory obligations. There is therefore much that management can and should do to support boards, including:

• help the Board think ahead, including to meet regulatory requirements; 
• provide clear and targeted information so that the main essence of an issue can be more readily determined; 
• provide tools to complement documents to explain issues, for example sensitivity tables or graphs in capital management considerations.
• Boards meet relatively infrequently and many directors do not work in the insurance industry. Therefore, to enable boards to make balanced, informed decisions, senior management should provide directors with access to important and relevant material in a manner that can be readily digested and understood. This approach, in turn, helps APRA and so, said Ms Rowell, there is a virtuous circle.
• Stronger support of boards by management will give APRA more confidence that boards are meeting their regulatory obligations and lead to lower intensity of supervision by APRA.”

While Ms Rowell may have been tailoring her words for a management rather than board audience, it sounds to us like she is saying boards should not complain, while emphasising that the real job is on management to make it easier for boards. It does not quite come together.

We wonder if APRA is still trying to come to terms with the changed emphasis as well. In the past APRA liaised almost exclusively with management. But the GFC showed that overseas institutions failed in part due to poor monitoring by an independent board (although this was not as important as poor law enforcement/supervision and poor regulation). In response, APRA has stepped up its board engagement. But this is relatively new to them as well.

Ms. Rowell’s speech can be read HERE.

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