EY has warned that upcoming legislation could have an impact on the insurance industry, despite its main focus on the banking industry.
In its first Insurance Agenda of 2018, the professional services firm said that it has been a “turbulent quarter” for the insurance industry, with the Bank Executive Accountability Regime (BEAR) “looming on the horizon” and the prudential framework for the Recovery and Resolution Planning “in flux.”
The BEAR legislation, which passed in February, is designed to address large-scale misconduct events that have led to “severe customer detriment” in the banking sector but could spill over into insurance, according to the update.
“This regime represents a move to regulate behaviour, where senior banking executives (and, eventually, those from other large financial institutions) are to set the ‘tone from the top’ and lead by example to promote good conduct,” the report said. “Aspects of BEAR will likely apply to insurers.”
As part of the new regime, APRA has been granted new powers to fine, ban or discipline senior executives in response to large-scale misconduct, including targeting remuneration, the report said.
The regime will be implemented by Jan. 1, 2019, and the report states that many large institutions are “scrambling to fully understand and implement the regulation especially with the Royal Commission requiring significant effort in parallel.”
Whilst banks are the main target of the regime, the report notes that institutions will be required to reinforce culture and good behaviour throughout their organisations, rethink remuneration and revisit some risk and operating processes such as risk and issue identification, escalation and remediation, alongside other recommendations.
“Like many regulatory requirements, the key to minimising pain is to find areas of the legislation from which the business can extract value,” the report said. “Insurers have the benefit of being able to learn from the banks’ experience over the next 12 months.”
In preparation, the report said that insurers should consider how BEAR could enable an organisation to create value and competitive advantage, how well an organisational structure operates in response to the legislation, and how BEAR will impact the role of and accountability of the appointed actuary.