In his speech to the 2019 Actuaries Summit, Australian Prudential Regulation Authority (APRA) Deputy Chair, John Lonsdale spoke on the importance of the role of actuaries in holding boards to account and the 'crucial' role actuaries play in identifying and calling out non-financial risk.

A high level overview of some of the key points Mr Lonsdale made is below. 

• Overall, there is a need to improve management of non-financial risk across the financial sector (and a need for actuaries to be more vocal): Citing the themes to emerge from APRA's analysis of the self-assessments recently completed by 36 financial institutions in response to the findings of the CBA prudential inquiry, Mr Lonsdale said that that there is 'clear evidence that risk management remains weak in financial institutions' and that it is 'is apparent that boards and senior managers need a stronger, louder and more insistent voice on their shoulder urging them to think again. Someone senior and trusted.  Someone independent. Someone with expertise in identifying and assessing risks'.
• Actuaries need to expand their focus to include non-financial risk: Given the current risk environment, Mr Lonsdale said that role of actuaries takes on heightened importance.  He emphasised that APRA's expectation is that actuaries not confine themselves to financial risk: 'My message today is that this influence cannot be confined to traditional financial risks, given the substantial damage to prudential soundness that can arise from the poor management of non-financial risks. Actuaries must learn to find the story behind the raw numbers – and then have the courage to speak up – if they are truly to fulfil their role of assisting with the sound and prudent management of an insurer, and ensuring the protection of policyholder interests is adequately considered'.
• Financial risk is no less important: Mr Lonsdale said that in calling on actuaries to broaden their focus, he is not implying that the focus on financial risk is any less important.  He acknowledged that the financial environment remains 'challenging', especially in the insurance space.  However, he said that the issues that have caused 'industry the most grief over recent years stem from the failure to identify and mitigate against non-financial risks' and the failure to do so in a timely way.  For example, 'too often the misconduct or poor industry practices highlighted by the Royal Commission [Hayne Commission] were well-known, yet companies had failed to address them' often at later significant financial cost eg the cost of remediating customers.  As such he suggested that non-financial risk is misnamed as, if 'left unaddressed, the consequences [of failing to address non-financial risk] become distinctly financial in nature'.
• APRA is not asking actuaries to 'go beyond their training and expertise': Mr Lonsdale rejected the idea that the regulator is asking actuaries to go beyond their training and expertise.   He said 'APRA doesn’t expect actuaries to be running their eye over marketing campaigns, signing off on board appointments or conducting staff surveys seeking signs of a poor culture. We understand that actuaries are focused on numbers, but numbers can tell a story beyond simply profit or loss'.  To illustrate, he gave as an example 'If your life insurer is taking an average of eight months to pay death cover claims, or accepting only one in four total and permanent disability claims, does that raise alarm bells for you?'.  He went on to say that APRA does not expect 'actuaries to always know what the precise story behind the numbers is, but we do believe they need the nous to recognise there may be a problem, and the courage to push boards and senior executives to examine and address it'.
• Not new? Mr Lonsdale said that the need to manage non-financial risk is not new, but that the environment has changed and the 'consequences of failing to properly identify, assess and mitigate risks, especially non-financial risks, are higher and potentially more expensive than they have been for many years'.  More particularly, he said the following factors have contributed to the changed risk environment.
  • Technology and the proliferation of online news/social media has meant that the speed with which non-financial risks can 'undermine the prudential soundness of a business' had 'perhaps never been greater. 'Society’s tolerance for egregious practices is much lower than it once was, while society’s ability to see and to call out unacceptable practices, and to highlight poor outcomes, is much more powerful. With financial sector trust damaged, it only takes one media exposé or social media outcry to cause a company serious financial damage, often in the space of days or hours, rather than weeks or months'. 
  • Regulators (including APRA) have a lower tolerance for misconduct or poor risk management, and a higher appetite for exercising their formal enforcement actions.
  • Entities must also contend with the Banking Executive Accountability Regime (BEAR), which applies to all authorised deposit-taking institutions from 1 July, and will soon be expanded to cover insurance and superannuation. 'Not only does this regime make boards and executives (including – potentially – senior actuaries) more accountable for their individual performance, companies themselves face penalties for failing to meet their obligations under the BEAR, or whatever threatening-sounding acronym is created for the insurance and super sectors.

  In such a high risk environment, 'the role of the Appointed Actuary becomes more crucial to protect both the interests of the institution and its customers' he said.

• The new cross industry standard is intended to strengthen actuaries influence within insurers: Mr Lonsdale said that APRA's new cross-industry standard, CPS 320 Actuarial and Related Matters, comes into effect on 1 July 2019.  He explained that APRA's purpose in introducing the standard is to strengthen the influence of the Appointed Actuary in general, life and private health insurers, especially on 'the most material matters' (including non-financial risk). 
• APRA's expectation of actuaries? Actuaries need to be prepared to speak up: 'APRA has provided the platform and handed over the microphone; actuaries need to turn it on and speak up' Mr Lonsdale said. 'To be truly effective, actuaries must be prepared to probe, test and challenge boards and management about the wisdom of their decisions, and potential risks they may not have fully considered. Vitally, actuaries need the ability to do this beyond the realm of traditional financial risks. We want them to broaden their thinking about what constitutes a financial risk into areas such as culture, governance, remuneration and consumer outcomes. This applies not only to Appointed Actuaries, but all actuaries, and across all APRA-regulated industries'.
•  APRA's expectation of companies? Companies need to be prepared to listen: 'Where actuaries need the courage to speak up, the companies they work for need the wisdom to listen, and the foresight to act when new risks are presented. The numbers always tell a story, and it is far safer – and less costly – if it is uncovered by an Appointed Actuary than an investigative journalist or a regulator with an enhanced appetite for enforcement' Mr Lonsdale said.

[Sources: APRA Deputy Chair, John Lonsdale, speech to the 2019 Actuaries Summit 03/06/2019; [registration required] The Australian 04/06/2019]