DEI in focus | APRA gives financial firms a heads up

4 minute read 22.02.2023 Kate Hilder, Siobhan Doherty

APRA flags that this years planned review of CPS 510 Governance will include 'consideration' of DEI

Key takeouts

Ahead of its planned review of CPS 510 Governance this year, APRA has shared an IAIS report highlighting the increasing supervisory focus on DEI in the insurance context globally and outlining a number of examples of the supervisory measures in place/being contemplated in various jurisdictions.

The regulator suggests the report may be useful to all APRA-regulated entities in 'considering how they approach diversity and inclusion'.

APRA has also flagged plans to consider how 'it might strengthen consideration of inclusion and diversity' as part of this year’s review of Prudential Standard CPS 510 Governance'.

Overview

As flagged, Australian Prudential Regulation Authority (APRA) has shared a report from the International Association of Insurance Supervisors (IAIS) – of which APRA is a member - presenting insights from a recent 'stocktake' of the diversity, equity and inclusion (DEI) initiatives being undertaken globally by insurance supervisors, relevant international organisations and the insurance industry.

In doing so, APRA makes clear that it considers (in line with the IAIS' position):

'strong diversity and inclusion practices' within the financial services sector, and diverse representation on boards, to be important in enhancing governance and risk management'.

As such, APRA considers the report may be useful to all APRA-regulated entities (not just insurers) in 'considering how they approach diversity and inclusion'.

APRA has also flagged that it will 'consider how it might strengthen consideration of inclusion and diversity across its regulated industries as part of this year’s review of Prudential Standard CPS 510 Governance'.

Key Takeaways from the IAIS report

Context

The starting point for the report is that 'diversity embedded within an organisation and reinforced by a culture of equity and inclusion' has a number of positive impacts both for insurers and for consumers. These include:
- 'positive[ly] impacts' on insurers' corporate governance and risk management (though improved decision making and reducing the risk of groupthink'
- potentially reducing misconduct by 'creating a stronger culture where employees feel they are valued and they belong'
- facilitating innovation
- supporting better/fairer consumer outcomes especially for consumers who are vulnerable, under-served or who have different needs from the 'majority consumer profile'.
The IAIS describes the report is a 'first step' towards understanding the level of focus being accorded to the issue by industry, the initiatives already being undertaken and a means of identifying areas for potential further work/focus. As such, the report does not make recommendations or set out an IAIS position on best practices in supervision. Rather it provides a snapshot of the current landscape of work on DEI internationally and the challenges supervisors are facing in this context.

Key Findings

A headline message in the report is that DEI is a 'topic of significant focus by industry and supervisors in several jurisdictions'. For example:

DEI is among the top priorities supervisors: Over 50% of supervisors surveyed indicated that promoting DEI within insurers is a medium or high supervisory priority.

Those supervisors that accorded DEI a high priority generally include it among their strategic priorities, often with a key focus on corporate governance and board diversity.

The remainder of insurers accorded DEI a low priority because: a) they considered it less relevant for their jurisdiction; or b) outside of their remit; or c) that they had already made sufficient progress.

The majority of supervisors (70%) consider they have a 'supervisory mandate to act' on the issue: The majority of supervisors (76%) reported that they are currently taking some sort of supervisory action on DEI.

The most frequently reported activity is advocating DEI through written and verbal communications, followed by asking insurers about DEI during supervisory examinations/interviews. This could include: asking how group-level DEI policies/strategies are being implemented at the local entity level; and/or asking about 'aspects of diversity and inclusion in governance reviews related to board effectiveness'.

Governance is a key focus: A number of jurisdictions identify insurers' governance as a key area for DEI supervisory focus, in line with Insurance Core Principle (ICP) 7 on Corporate Governance.

The report includes a number of examples of the actions/planned taken/planned to be by various jurisdictions. This includes the release by UK financial regulators of a discussion paper – Diversity and Inclusion in the financial sector – Working together to drive change (DP21/2) - seeking feedback on a number of ideas aimed at increasing diversity within the sector, with a focus on embedding diversity and inclusion into firms’ governance frameworks. The UK FCA has indicated that it intends to develop proposals for consultation in 2023.

Less supervisory focus in the area of market conduct: The report highlights that there is overall, less supervisory focus on DEI in the area of market conduct – i.e. ensuring insurers are focused on delivering good customer outcomes across diverse consumer groups.

One of the examples of where this has occurred highlighted in the report, is the Australian Design and Distribution Obligations (DDO) regime which requires product issuers (including insurers) to consider consumers' objectives, financial situation, and needs in determining the target markets for their products.

Key challenge from a supervisory perspective: There was 'broad agreement' that a key challenge for supervisors is 'the absence of an agreed standard, best practice guidance, or regulatory framework for approaching DEI-related supervisory activities'.

An area of ongoing focus: IAIS to undertake further work

IAIS flags that DEI is expected to continue to be a strategic theme across the IAIS' work program. It's anticipated that there will be 'interlinkages' with other IAIS priorities including the IAIS' work on financial inclusion, fintech, climate risk and 'protection gaps'.

The IAIS plans to take forward two new projects specifically focused on DEI:

The first will examine the link between DEI within insurers and its governance, risk management and corporate culture.
The second will examine how DEI considerations in insurers' conduct, and in their supervision, may result in fairer treatment of consumers who are vulnerable, under-served or have different needs in comparison with a normative or majority consumer profile.

[Sources: APRA media release 17/02/2023; Full text IAIS report: Diversity, Equity and Inclusion - International Association of Insurance Supervisors]