The NED Blog: Regulation and the regulators

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The regulatory agenda is always something of a concern to the independent non-executive director in the insurance market and keeping a close eye on the 2019 and 2020 plans from both the Financial Conduct Authority and Prudential Regulatory Authority is on the 'to do' list at this time of the year, explains Michael Gaughan.

Making sure you are up to speed on the key points, regulatory priorities, hot topics, areas of concern, recently published reports and any open or upcoming consultations is a pre-requisite for the role. I always find it interesting to note that while both the Prudential Regulatory Authority and Financial Conduct Authority want independent directors in the insurance industry to be aware of these key priorities, there are few opportunities for them to interact directly with the regulators.

Ignoring Brexit, in 2018 the PRA was mainly focused on assessing capital levels and business models, following on from stress testing exercises carried out in 2017. A stress testing exercise is a detailed assessment that an insurer will undertake to see how they would cope with an extreme set of circumstances and will provide reassurance, or not, that they can survive the next crisis.

Plans are now underway for a new round of stress tests to be undertake by the end of 2019 and include cyber underwriting and climate change this year. The stress test result is a good indicator for the NED not only on how the company would cope financially and from a capital erosion point of view, but also in terms of the way the executive team demonstrates how they would deal with  a big problem – and whether they are up to it.

The FCA has focused recently on culture and governance, data security, innovation, technology delivery, and the treatment of existing customers in terms of value, pricing and complaint levels. It is the dual pricing one that is really gaining traction now and boards are having to come to grips with this long-standing practice across the industry and the many infrastructures that it supports. A market consultation by the FCA is an early indicator and a good clue to the NED that it is time to check that plans are in place to make sure that your company comes out on the right side of the expected behaviour, and to probe deeper on where the company stands relative to the rest of the market.

If you find yourself in an ‘outlier’ position then it is time to drive the issue onto the board agenda for serious discussion.

Both regulators have striven to get greater individual accountability for directors – including NED’s – and to also encourage the right skill sets in the boardroom. Technology and the rising insurtech tide are key issues that the board must either possess or have constant access to and with the advance of technology we have seem an explosion in the volume of data that is included in board packs.

A key skill is working out if you are getting the right management information and to what degree can you absolutely rely on it. Can you for instance trace a particular figure back to its source to convince yourself it is correct? A good NED will spend time pondering on the accuracy of the information before them and also be able to focus on the key points without getting buried in detail. Seeing the wood from the trees is not always as easy as it seems. 

Michael Gaughan has spent more than 35 years in the insurance market in various executive and independent non-executive roles.

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