U.K. Insurers are Invited Late to the Diversity Party – but Regulators Alone Cannot Make Them Mingle | Wolters Kluwer
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  • Insurers are Invited Late to the Diversity Party – but Regulators Alone Cannot Make Them Mingle

    By Martyn Oughton

    Published November 08, 2017

     The PRA has announced the need for Solvency II firms and large Non-Directive Firms to put in place a policy on diversity in board recruitment and to show consideration for diversity during the recruitment process.

    This is rather a late development for insurers, as the requirement has been in place for banks for a few years, alongside other longer-standing initiatives which have been encouraging firms to consider diversity in their recruitment.

    So this is not a new subject. But for insurers, this will be the first time they have been subject to a direct regulatory requirement. Whilst there is now an acknowledged need for diversity amongst the boardrooms of our largest financial services organisations, will pressure from regulators be the factor that will tip the scales and accelerate the move away from boards consisting entirely of white, middle class men? The answer can be partly found by looking at what has happened so far in response to regulatory pressure, but for insurers, there are other considerations.

    What is diversity anyway?

    Before going into this, it is worth asking the question – what exactly is diversity? In the context of employers and in particular, their most senior managers, its roots can be traced in the UK back to the earliest equal opportunities legislation, designed to prevent prejudice against certain types of people when appointment decisions are made. In the 1970s, this kicked off with the Equal Pay Act of 1970, followed by the Sex Discrimination Act of 1975, the Race Relations Act of 1976, and latterly, the Disability Discrimination Act of 1995.

    These were designed to legislate directly against actions taken by employers that deliberately prejudiced against women, people with diverse ethnic backgrounds and people with a disability. Without going into detail, it is hard to imagine what sort of society we would be living in today without the impact of this legislation being felt.

    But this still does not answer the question. Legislation up until this point focused on whether individuals fell into a particular category of individual who needed protecting. The big change came in the 2000s when, as a member of the European Union, the UK found itself having to implement a swathe of Directives tackling injustice for people with differing sexuality, religious beliefs and age, as well as the issues already tackled by domestic law. This has now all been consolidated in to the Equality Act 2010, which refers to a set of “protected characteristics” which bring gender reassignment and civil partnerships into the mix as well.

    In short, diversity is embracing the differences between people and making sure that as far as possible, these differences are not the sole reason why someone should not have the same opportunities as everyone else. So how does this shake out at the top tables of major finance businesses?

    Boardroom blitz 

    The PRA’s announcement in its consultation on optimisations to the Senior Insurance Managers Regime appears at face value to be a significant shift for Solvency II firms and the largest Non-Directive insurers, requiring them to implement a policy which should, quoting the PRA, “ consider a broad set of qualities and competences when recruiting board members and have a policy to promote diversity among board members”. Also, firms that have websites (and let’s face it, who doesn’t these days?) also need to publish details of how exactly they comply with that policy.

    If this sounds radical, it is not. Far from it. The requirement to publish a policy on diversity has been in place for banks and investment firms since the Capital Requirements Directive IV (CRD IV) was introduced at the start of 2014. The proposed requirement for insurers effectively mirrors the basic requirements of the rules that were put in place for the banking sector, so arguably, insurers are being brought very late to an existing requirement that could have been imposed on them earlier. No doubt the PRA would argue that it needed time for insurers to get to grips with Solvency II first.

    Given that banks in particular have had to publish diversity policies for some time now, it is possible to do a search of these policies for leading institutions, to see to what extent diversity is now being considered in the recruitment process. A quick web search on these policies produces some underwhelming results.

    Overall, these policies are rather brief. Yes, there is talk about considering a wide range of skills, competencies, backgrounds and experience when selecting candidates for appointment. But outside of that, there is little in the way of consistent acknowledgment of what each firm considers to be diversity. The one notable exception is gender, with the clear majority of firms stating some form of target to increase the number of women on the board to a certain number by a certain date. This is driven by the strict requirement under CRD IV to set such a target, so its presence is not surprising. But unfortunately, some policies go little further than saying that there are not enough women on the board and what the firm intends to do about it. Whilst this is a very important matter to be addressed, it is by no means the only one.

    Why the fuss? 

    Without considering the matter in detail, the temptation is to ask what the point of all of this is. Not from a political or moral point of view, but from a practical one. In other words, what is the PRA trying to achieve?

    The exact reason, quoted by the PRA, is, “ …to improve the effectiveness of the board, enabling it to run the business more prudently and to ensure the firm’s safety and soundness and better protection of the firm’s policyholders.”

    In other words, the regulator is sensing that there are barriers to the effectiveness of governance structures in insurers which are caused by a lack of diversity at board level, resulting in sub-optimal decisions being made. Specifically, it highlights the dangers of “groupthink”, brought about when robust challenge is not in evidence. To a certain extent, the regulator is right. Academic research into why leadership fails in financial services institutions has highlighted issues such as a lack of ability to move with the times, pressure to make poor decisions and putting blind trust in others. Even back as far as 2002, the European Commission, when conducting the review which ultimately led to Solvency II, stated that the review of solvency requirements also needed to include the way in which firms are managed, and manage their risks, together with what it called, “…weakness in the face of inappropriate group decisions.”

    The challenge is to separate the wider political, moral and ethical drivers for greater diversity and inclusion in the workplace at the most senior level, from the core concerns of a financial regulator. The wider political push for firms to become more diverse is quite wide ranging. At the same time as incorporating diversity policies to satisfy regulatory requirements, many banks will also have signed up to HM Treasury’s Women in Finance Charter, which is focused on increasing the number of women in senior posts. But the PRA is not going to have this as its primary concern.

    What the regulator wants 

    Getting down to brass tacks, what does the PRA want from the insurers it regulates? Simply, it wants to make sure they can operate without causing any undue risk to the UK’s financial system and its stability. For this to happen, it needs to make sure insurers manage their risks well, hold enough capita, are liquid enough to meet their liabilities when they fall due and can demonstrate that they can withstand all possible external disruptors to their operations. That is prudential regulation in a nutshell for insurers.

    The link between this aim and board structure very much boils down to the risk that a board consisting of white, middle class, middle aged men, will not necessarily have the same degree of challenge, original thinking and different perspectives than if the board consisted of people from differing backgrounds. This is not a political motivator – it is a practical one.

    The group think issue is clearly a real one, not a theoretical one, as the regulator can clearly see a link between board behaviour and the problems at firms which arose during the financial crisis. So, will a simple requirement to consider diversity and post it on a web page do the job?

    At first glance, this is unlikely. The way in which some banks have drafted their diversity policies suggests they have done what they need to do in order to comply. If the regulator does not follow this up with additional supervisory activity, then if this were the only driver, the matter may not progress much further. Luckily there is help at hand for the regulator.

    Unlikely allies 

    Because the political and commercial drivers for diversity are now becoming so strong, the matter is very difficult for firms to ignore. You not only have the requirements in the Financial Reporting Council’s Corporate Governance Code for those firms affected, which say that they have to have a diversity policy and appoint an external search consultancy or openly advertise to fill chairman or non-executive positions, but you also have bodies such as the Equality and Human Rights Commission keeping the issue in the public eye.

    The commercial advantages of diversity are also now being seen. PricewaterhouseCoopers’ 18th Annual Global CEO Survey points to a substantial number of CEOs who believe that diversity has enhanced their business performance, and a significant number also say that this has opened up new industries or territories for them. However, the same survey reveals that a third of businesses still do not have a diversity and inclusiveness strategy, and there is still a warning about challenges in recruiting the right people but also retaining them.

    So, for insurers, what does this mean? In the short term, probably very little, as board appointments tend to go in cycles of a number of years, so immediate change is unlikely. But the PRA does not appear to be wrong in its intention to require insurers to consider board diversity and go public about its policy – it just seems a bit late in the day to be doing so.

    The question is, will this be enough? In the insurance sector, there are specific challenges which arise from the highly-complex nature of their operations, and the skills and knowledge needed to run these businesses effectively. To a certain extent, the diversity of appointees is going to be driven by the extent of diversity amongst actuaries and the level of seniority they have reached. This is something insurers should consider as a practical point for their policies in the short term – but there is nothing to suggest that boards of insurers cannot become more diverse now, as the actuarial profession does not consist entirely of white, British, able-bodied males.

    However, insurers need to realise that they cannot be immune from the requirements in other sectors for diversity to be considered, and that they need to understand the regulator’s motivations for requiring them to do so.

    Yes, there will be challenges and yes, change may take some time to achieve. But this is a definite step in the right direction, not just from the point of view of prudential supervision and stability of insurers, but for our society as a whole.

    About the author: Martyn Oughton is a financial services professional with over 20 years’ experience in the industry. He has been a compliance professional since 2007. In 2009, he became a Professional Member of the International Compliance Association (ICA), and has recently been an examiner for the ICA, marking exam papers and assignments for their UK and International Compliance, Anti-Money Laundering and Financial Crime Diplomas. A regular contributor to Wolters Kluwer’s Compliance Resource Network, he also regularly writes for the ICA’s members’ journal “inCompliance”, and is also a freelance business-to-business copywriter and article writer.





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