Some industry stakeholders are raising concerns that bigger insurers are passing the regulatory burden of CPS 230 downstream to their smaller underwriting agency partners. The big insurers are doing this, they allege, through “invasive contracts” and “unlimited liability clauses.”
The Australian Prudential Regulation Authority’s (APRA) new regulation, CPS 230, comes into force in July. This prudential standard aims to strengthen large insurers’ operational risk management, and some industry sources say it's an industry “game-changer.” However, a range of stakeholders have expressed the view that small insurance firms could be forced out of business by the compliance obligations.
According to FreightInsure, one major issue for many underwriting agencies is a lack of resources to manage the new compliance obligations the way big insurers can.
“You can’t sit back and rely on your insurers to tell you what to do,” said CEO Simon Schwarz (pictured above left). His insurtech agency offers embedded covers for transport and logistics businesses and decided to take responsibility for its own CPS 230 compliance obligations.
“Agencies need to establish their own operational risk frameworks,” said Schwarz. “For example, if your phone system is down for the day, what is the protocol to service your customers? If there’s a data breach, how do you respond?”
There are also obligations around measuring and reporting complaints, he said.
FreightInsure’s technology was provided by Curium, a compliance software company. Curium’s CEO Tetiana George (pictured above right), a board member of Insurtech Australia, has repeatedly warned of the pressure CPS 230 could place on smaller agencies, including in articles published by the Australian and New Zealand Institute of Insurance and Finance (ANZIIF).
“Underwriting agencies are the first obvious group impacted,” she said in an interview last year with Insurance Business.
However, other stakeholders, some also with business interests involved, have also said that CPS 230 could have quite drastic impacts on the industry’s smaller agencies.
At Steadfast Group’s FY24 results presentation last year, an analyst asked that firm’s leaders about merger and acquisition (M&A) opportunities that could present themselves as CPS 230 plays out. The analyst asked if Steadfast has had any discussions yet with smaller agencies that may struggle under the regulation once it comes into force?
“There are some opportunities that may come forward,” said CEO Robert Kelly. “There are underwriting agencies that are being told, not that there’s anything wrong with them, but that they [APRA] don’t want to handle smaller underwriting agencies.”
He suggested that M&A opportunities could appear by next month. At that time, he said, some agencies may come under pressure from their capital providers to show how they are complying with this new rule.
Kelly’s COO, Nigel Fitzgerald, agreed.
“Then as they [the insurers] look to apply that [CPS 230] to their agencies more specifically, then an agency will identify that the investment required doesn’t meet the operating margins of the business and they will look for an exit,” said Fitzgerald.
George said if smaller agencies wait for their bigger insurer partners to dictate compliance terms it will lead to restrictive contracts and greater liability exposure.
“Insurers are forcing agencies to shoulder the compliance load, but the reality is agencies don’t have the resources to manage compliance the same way big insurers do,” she said.
Curium said this should be seen as a warning for agencies to take control of their risk and compliance strategy.
“There’s a power imbalance where agencies and smaller suppliers are being strong-armed into signing invasive contracts and unlimited liability clauses and not because APRA requires it, but because insurers want to protect themselves,” said George.
She encouraged agencies to push back against any insurer contract terms they see as onerous and engage them in active risk conversations.
“If the major insurers fail to comply with CPS 230, the fallout won’t just hit them, it will cascade down to underwriting agencies and suppliers, creating serious business risks for everyone in the chain,” said George.
How do you see CPS 230 playing out across the insurance industry? Please tell us below
