RBNZ reveals risk governance findings

by Maryvonne Gray 11 Mar 2015

RBNZ reveals risk governance findings

The Reserve Bank of New Zealand (RBNZ) says while the overall quality of risk governance in the 17 insurers it reviewed was ‘reasonably good,’ a small minority of insurers have risk governance weaknesses and an inadequate programme of improvement underway.

In a report released yesterday RBNZ said that its reliance on self-discipline as one of the three pillars of its regulatory approach was ‘generally well-placed’.

However, it added: “This does not mean that we think the sector has generally reached a level of maturity in regard to risk governance that we would be satisfied to retain. Rather, the quality of risk governance appears to be on the right footing, a work in progress and generally more enlightened than we had anticipated so soon after licensing.”

One issue highlighted across all the insurers was a lack of robust reviews of risk frameworks, with most changes to risk management programmes submitted for approval consisting of ‘relatively minor wording changes rather than substantive changes to the framework’.

“We encourage all insurers to regularly review their risk management frameworks,” the Reserve Bank said in the report.”

It also found some insurers struggling with the balance of drawing a line between the role of governance and the role of management.

Directors often referred to the challenge of dealing with the volume and complexity of information presented at board risk committee meetings, with some insurers being more pro-active than others at managing the issue.

Problems could also arise where the insurer was a subsidiary of an overseas parent – in one instance the risk governance framework was very strong at parent level but relatively weak within the subsidiary.

The report found: “The reason for the weakness appears to be due to the subsidiary utilising the human resources of its parent rather than having separate resources and then not making a sufficient distinction between the governance of the parent and the governance of the licensed insurer.”

It stressed that governance needed to be clearly separate from the parent, even if some directors were on the boards of both the parent and the subsidiary.

The report also found that the better an insurer’s risk governance framework was adapted to suit New Zealand conditions, the more satisfactory the insurers found the outcomes delivered.

Insurers who rated strongly were those who set the tone from the top through their communication and actions in relation to risk.

“An example of this leadership is a catchphrase used in one insurer that ‘good news is bad news early’ which has given a clear signal regarding expectations in relation to communication of risk issues,” the report said.

“Directors are taking ownership of information and strategic decisions in strong risk cultures whilst in weaker risk cultures directors tend to receive information and monitor it but are not in the driving seat.”

Others were shaped by a previous crisis which had left a legacy of ‘we don’t want to go there again’.

The report said individual insurers had each been given feedback of the findings and those with particular weaknesses were being urged to review their risk governance frameworks.
But, the report concluded that the sector was ‘well-placed for the ongoing improvement that we want to see and which most insurers recognise as necessary’.