Compliance costs surge at Australia’s P&C majors

December 18 2019 by Yvonne Lau

Despite record breaking bushfires sweeping the country, it is regulatory scrutiny that has arguably caused the most apprehension for management at Australia’s P&C insurers in 2019.

In February, the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry released a report that signified stricter regulatory supervision and enforcement for the market.

Around 20% of the recommendations specifically pertained to insurance. The report outlined sales and distribution reform, including commission and cold-calling practices, and the establishment of enforceable, mandatory codes that keep companies accountable.

“The introduction of so many regulatory changes at one time will have a distracting impact on management.” Insurance Council of Australia spokesperson

In addition to the commission’s recommendations, market players will also undergo risk governance self-assessments as requested by the Australian Prudential Regulation Authority (APRA), and the ongoing implementation of IFRS 17’s global accounting standards.

An Insurance Council of Australia (ICA) spokesperson told InsuranceAsia News (IAN): “Over the next 18 months, the ICA and its members will be focusing on development and then legislation implementation fulfill the Royal Commission’s recommendations related to general insurance.”

The ICA added: “The introduction of so many regulatory changes at one time will have a distracting impact on management and require significant additional resources being put into regulatory and compliance matters.”

Mounting costs, squeezed margins
Moving into 2020, the regulatory clampdown has shaped insurers’ strategies and is squeezing profit margins.

IAG has outlined a A$50 million (US$34.3 million) increase in regulatory and compliance costs for fiscal year 2020. This was driven by more rigorous requirements and further investment in risk-related systems and resources. The Sydney-headquartered firm saw compliance costs increase by A$20 million (US$13.6 million) in the 2019 fiscal year.

Peter Harmer, chief executive and managing director of IAG, commented: “We see it as a permanent part of the cost base going through.” A company spokesperson noted it as a positive development, telling IAN: “These costs [are] a recurring feature in the short to medium term. A strengthened risk capability [is] an enabler of growth in the longer term.”

IAG has been completing a retreat from Asia over the last few years including the stake sale in SBI General Insurance; the impending funds could prove useful.

“APRA expects the same high standards of risk management [for insurers], including for non-financial risks, as we do for the banks.” Geoff Summerhayes, APRA

For Brisbane’s Suncorp, which changed their chief executive during the year, the numbers highlight the same – the firm will see an A$155 million (US$106.3 million) in governance and regulatory investment for 2020, an A$60 million (US$41 million) increase from 2019. Its 2019 annual report noted operational costs for regulatory projects increased by 76%, impacting its after-tax profit.

A representative told IAN: “Suncorp is embracing the changing regulatory environment as an opportunity to further improve our systems, processes and capability.” Its 2019 annual report noted: “The broader response to the [APRA] self-assessment now forms part of our regulatory programme.”

A more costly outcome befell Allianz Australia which became the first APRA-regulated insurer to have additional capital requirements imposed following a self-assessment in August.

As a result, the firm, which also offers life insurance, will need an extra A$250 million (US$171 million) for risk governance and management. Geoff Summerhayes, an executive board member at APRA, said that the decision sends a message to all insurers: “APRA expects the same high standards of risk management [for insurers], including for non-financial risks, as we do for the banks.”

Though the final implementation of the Royal Commission’s recommendations is dependent on the Australian Securities and Investment Commission’s (ASIC) 2022 review – it is evident additional time and resources will be need to be deployed for heightened regulatory and compliance programmes.

The market is adapting to heightened scrutiny at a time when insurers are already stretched aiding customers affected by bushfires and other recent catastrophes; however, walking the tightrope between customers and regulators’ expectations is ultimately what senior management are remunerated to do.