In 2019 the Hayne Royal Commission’s final report identified widespread and systemic misconduct across the financial services sector, including in the insurance industry. One key finding was that boardroom directors were responsible for this misconduct because they did not fully understand the businesses they directed.
A recent Actuaries Institute research paper has produced an assessment aid to help businesses solve this problem and choose better board directors.
One of the paper’s authors, Barry Rafe (pictured above), a former Actuaries Institute president, said their research was well received because the chairs of large insurers are looking for insights into how to appoint new directors.
“The aid that we put out actually gives them a good checklist they can work through, and it gives them some legitimacy and justification as to why they might appoint a director from broader fields than just straight insurance or your straight traditional director.”
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Rafe, who is also principal of Rafe Consulting, said the research found that the traditional way of appointing directors using a skills matrix isn’t sufficient.
“What we found was that actually doesn’t go far enough [because] skills and capabilities are different. You need the skill, like a finance skill or a technology skill, but you also need the capability to apply that as a director and so what we identified was that there’s actually a difference,” he said.
Rafe said their examination of financial services organizations, including annual reports, found that they don’t go deeply enough into what is required in a capable director.
Co-author, Ian Laughlin (pictured below), a former Australian Prudential Regulation Authority (APRA) deputy chairman, said the report’s conclusions apply to the insurance industry and across the financial services sector.
“I think there are specific skill set differences between a banker and an insurance company. In fact, we mention in the paper that an understanding of the asset side of the balance sheet, for example, with banks is really important and an understanding of the liabilities side for insurance companies is really important. But fundamentally, with many of the skills and particularly the capabilities, there’s no distinction between insurance and banks,” said Laughlin, who is also principal at PFS Consulting.
Many of the report’s conclusions came after road testing ideas with various company board directors. The duo also received insights from a panel discussion hosted by the Actuaries Institute involving current and former directors. Rafe said one surprise from this discussion was the question of ‘golden careers’ and the tendency to appoint people to boards who have an unblemished record.
“What one of the panellists said is that what you’re actually missing there is the opportunity to appoint directors who’ve actually been through the fire, who’ve actually been in the business and therefore can see the signals.”
Rafe said another interesting observation by the panel was the issue of how each industry develops its own language.
“One of the directors talked about how insurance has this reversionary bonus and terminal bonus language, and what the language does is potentially embed poor product design. So, he said that you actually need directors from different industries who talk different languages and in that way test the assumptions made at board meetings about how things operate,” said Rafe.
Laughlin and Rafe said their research also shows that while financial services businesses are complicated you don’t need every director to understand the details or the complexity of the financial statements.
“You don’t need to know that to know that the products are bad. You actually need directors who also understand community expectations more broadly, not just the detailed financials,” said Rafe.
According to their report, one panellist in the discussion also emphasized that two core capabilities in insurance are claims management and underwriting and that these have been lacking on boards of the major life insurers. The panellist suggested these have contributed to poor claims experiences.
The Board Assessment Aid at the end of Rafe and Laughlin’s report provides an example of a skills and capabilities matrix that can be adapted for selecting board members for insurance industry companies. The matrix includes illustrative skills and capabilities to highlight how it might work. Skills include ‘financial literacy’ and ‘risk management’, while capabilities range from ‘business and financial acumen, insightfulness, strategic thinking’ to ‘social awareness and insights.’
Rafe said the response from across the industry, including from regulators, has been largely very positive. However, Laughlin doesn’t expect everyone to agree with their conclusions.
“We obviously didn’t involve the whole director community and there will be people who disagree with what we say, no question, but it would be a pretty boring paper if you didn’t get some disagreement because what we’re doing is challenging the status quo.”
