In brief
Written by Senior Regulatory Counsel Michael Mathieson and Partner Michelle Levy
As an institution, APRA can be partial to bureaucratese. As keen readers of APRA's writings, we sometimes find ourselves asking – what is APRA really saying here? And that is a question worth asking when reading APRA's recent letter to life companies setting out its concerns with group insurance.
Times are difficult for life companies. Many have suffered significant losses, mainly through group disability policies issued to trustees of industry superannuation funds.
APRA has been working with the life companies on this matter, at least since December 2013. In a recent letter, APRA provided its findings and comments.
Slow learners?
We think the most telling passage in APRA's letter is this:
It is important that insurers carefully consider the various matters discussed [in the letter], particularly as some of the issues in more recent times have also been seen in the past. APRA encourages insurers to document lessons learned from this recent experience and where necessary adopt revised approaches so as to be better prepared to respond in future. Where appropriate, the board rather than management should consider or address matters raised.
What is APRA really saying here? This is our take. APRA thinks life companies can be slow learners and should try harder. APRA's confidence in senior management is not high. And it wants life company boards to get more involved in the business. APRA asks insurers whether they are satisfied 'that the board's engagement with management is appropriate'.
Contributing factors
APRA lists the factors that were cited by insurers as contributing to their difficulties. Lawyers are handed a slice of the blame. Apparently lawyers are partly responsible for 'increased member awareness of insured benefits' – these being benefits members have paid for. Other factors seem to be more of the insurers' own making, such as 'increased automatic acceptance limits' and 'generous terms and conditions (including weaker eligibility and underwriting)'. These are both combined with structural issues – changes to workers compensation and changes to the way we work – there are more claims for disability based on mental health.
In providing the list, APRA is careful to say it is just reporting what the insurers said to it and that the list 'should not be read as criticism of superannuation fund member behaviour or exercise of rights'.
And it can be expected that fund members will continue to press their claims, as they are entitled to do. As the work force ages and as the jobs for unskilled workers decline, more fund members will look to the group life insurers for disablement benefits and, as the alternatives close, lawyers are more likely to be asked to fight harder.
Board and management
APRA investigated the involvement of boards and management in handling these difficulties. The responses were varied. Most insurers thought their existing governance and reporting structures were sufficient. Others said 'board engagement and reporting had significantly increased' – but that this was at the joint instigation of the board and management and that 'very few insurers implemented additional engagement and reporting at the behest of management alone'.
APRA's intense focus on boards continues.
Claims management – and the duty of priority?
The letter describe changes insurers have made to their claims management processes. In response APRA says:
APRA would be concerned if insurers chose simply to take a 'harder line' in considering claims in an effort to reduce claims costs. Insurers need to be satisfied that claims are assessed fairly and in accordance with the policy terms. This is an important requirement in order for the board to be confident that it is meeting its obligations under section 48 of the Life Insurance Act 1995.
The first two sentences are uncontroversial – insurers have duties to exercise their powers under a policy with utmost good faith (implied into each policy by section 13 of the Insurance Contracts Act 1984) and, as Australian financial services licensees, a duty to do all things necessary to ensure they provide financial services efficiently, honestly and fairly (under section 912A(1)(a) of the Corporations Act 2001). But the last sentence is.
Section 48 of the Life Insurance Act 1995 says that the directors of a life company must take reasonable care and exercise due diligence to ensure that the life company gives priority to owners and prospective owners of policies 'in the investment, administration and management of the assets of a statutory fund'. There is no case law on the duty of priority and very little guidance from APRA about what it thinks is required by the duty.
The duty of priority is now scattered throughout financial services laws – in addition to life companies, responsible entities have a duty of priority to members under the Corporations Act, financial advisers have a duty of priority to their client under the Corporations Act and superannuation fund trustees now have a duty of priority to members under the Superannuation Industry (Supervision) Act. The precise meaning of the duty is not clear in any context but, whatever it means, the context is very important in determining what it might require. For a life company, the duty is limited to the investment, administration and management of statutory fund assets; it does not apply 'at large' to everything the life company does.
The link between a life company's claims management philosophy, on the one hand, and the investment, administration and management of statutory fund assets, on the other, isn't strong and we query whether the duty of priority has much, or anything, to say about claims management or, at least, whether it has anything to add to the life company's obligation to exercise its powers under a group life policy in good faith.
Regulatory capital
Finally, regulatory capital. It is difficult to avoid the conclusion that APRA thinks life companies have been a bit blasé about their capital assessment processes.
Even though substantial capital injections were required and market conditions underwent significant changes, most insurers did not change their target capital policy according to APRA. Where changes were made, they were typically minor, and no insurer updated their policy outside the normal review cycle.
APRA noted that the majority of insurers required significant capital support and sounded this warning:
… insurers cannot assume that such capital support will always be forthcoming in times of poor conditions, and APRA would expect their ICAAP to reflect this.
Structural changes
APRA's conclusion seems to be that there is 'room for improvement' by life companies in addressing change. But many of the changes are social and structural and it is not obvious that they can be addressed merely by improvements by life companies, nor even life companies and trustees working together.