Ian Laughlin

Ian Laughlin, a former deputy chair of APRA, with a distinguished corporate career as a managing director and board member, has been awarded the Australian Actuaries Institute’s highest honour, a gold medal, in recognition of more than four decades of actuarial work.

The gold medal is presented for outstanding work in service of the profession, business, government, or community.

“Ian’s work has been socially important,” said Actuaries Institute President Jefferson Gibbs. “He has been involved in leading the industry, grappling with big issues that affect insurers, businesses and consumers. Doing the right thing by consumers, serving the community, has always been part of Ian’s mindset,” Mr Gibbs said. “It is a part of his DNA.”

Mr Laughlin was named Actuary of the Year in 2018.

He has been a member of the Actuaries Institute Council; chaired the Actuaries Institute’s Risk Management Practice Committee; led a taskforce on implementing global accounting standard IFRS 17; was part of the Institute’s COVID-19 working group; and he was the leader of a major piece of work by the Institute to drive changes to Australia’s individual disability income insurance sector.

APRA warned the sector, which lost $3.4 billion over five years, that it would suffer excess capital charges unless there were changes. In 2019, Mr Laughlin set up the Institute’s Disability Insurance Taskforce. This year, the Taskforce released comprehensive recommendations for reform to the sector, which Mr Laughlin said had become unsustainable. His aim was to ensure the sector remained economically viable and continued to provide valuable cover for the community.

Mr Laughlin, currently Principal at PFS Consulting, said: “I’ve been very fortunate in my career to have worked in a wide range of financial services, including technical, management, risk, governance and regulation.”

Mr Laughlin began his career after completing a Bachelor of Science, (Maths) at the University of Queensland. He became a Fellow of the Institute of Actuaries of Australia, a Chartered Enterprise Risk Actuary (CERA), and a Fellow of the Institute of Actuaries (UK), along with Fellow of the Australian Institute of Company Directors. He is a Distinguished Fellow of the International Association of Insurance Supervisors.

He has served on the Australian Government’s Financial Reporting Council and the Administrative Appeals Tribunal.

He views broad risk management as the overarching theme of his career. “We don’t live in a stable or consistent world,” he said.

“Society is ever-changing, and at a faster rate. We all need to understand the environmental and social changes around us to understand the risks coming our way,” he said.

“Look at social attitudes to mental health – they have changed dramatically, and we see that reflected in disability claims that were not on the radar 20 years ago.

“Boards, management and others in the business, need to think about social change and how that might influence the business, risk management and meeting customers’ expectations.”

The Disability Insurance Taskforce has made recommendations, in three papers, for the reform of the Individual Disability Income Insurance sector.

Mr Laughlin has written a Dialogue paper on social risk for financial institutions following the release of Royal Commissioner, Kenneth Hayne’s final report; another Dialogue paper co-authored with actuary Hadyn Bernau on the concept of a Social Condition Report for financial services businesses; and a third Dialogue paper, co-authored with fellow actuary Barry Rafe, on governance. This paper addresses the special needs of financial service boards.

Actuaries Institute Chief Executive, Elayne Grace said: “Ian’s strength is the breadth of his thinking. He has had a stellar corporate career, leading businesses as a chair and a managing director, and he has always been able to keep in mind the broader community. He has been influential in his role as a regulator, thought-leader writing key position papers for his industry, and a global leader in the actuarial profession.”

Mr Laughlin said: “I owe so much to my profession as an actuary. It has provided the opportunities and framework for hugely interesting and challenging work on issues I care about and that are also important for the community. I’ve had a wonderful career, and the profession has been at the heart of that.”

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Ian Laughlin

Two actuaries have developed a skill and capability checklist to help Australian bank and insurance companies appoint Directors with the right qualifications to prevent misconduct uncovered by the Hayne Royal Commission.

Barry Rafe, a former Actuaries Institute President and experienced director and board advisor, and Ian Laughlin, a former APRA deputy chair, said their Dialogue^[1] paper, The Special Needs of Financial Services Boards, provides a practical toolkit for Board appointments, specifically aimed at bank and insurance companies.

The Hayne Royal Commission revealed misconduct in the sector that resulted in the resignation of chief executives, Board members and Chairs, along with about $10 billion in payments to right wrongs. It highlighted acute failures. The Dialogue paper asks whether Directors enabled that behaviour because they failed to understand their businesses.

Financial service businesses are extremely complex, with long-term contractual obligations to customers, significant information asymmetry, short-term profit pressures and frequently, a third party intermediary between the business and customer. Customers often have a large financial exposure to these institutions.

And while there has been substantial change in the membership of financial services company Boards since Royal Commissioner Kenneth Hayne handed down his findings in February 2019, there is evidence that the misconduct identified reflects Directors’ lack of knowledge, “clearly reflecting systemic gaps between the essential Board skills and capabilities, and Board appointments”, the paper states.

Identifying those gaps is essential to ensuring mistakes are not repeated. The Dialogue provides an aid to help financial services Boards recruit the correct mix of Directors. It states that assessment for a new Board member should be considered within a set of clearly defined criteria, and “if not, why not?”

Using the aid would likely lead to a Board with at least three Directors with deep operational experience, earned working in the financial services sector. These Directors should have handson experience to help guide them through the trade-offs management routinely make when running a bank or insurance company.

Boards should include Directors from other sectors; the Chair should be a former CEO; and those with ‘golden’ or unblemished careers may not be as valuable to the Board as those who have survived an insolvency or major crisis.

“Risk aversion to Director selection may result in Boards lacking Directors with foresight for emerging challenges and a lack of experience to be able to effectively recognise and manage them,” the paper states.

Directors must understand broader community expectations and provide ethical leadership.

Mr Rafe said Boards are not made overnight. “They evolve over time, as Directors come and go.” To continue to remain effective, “Boards therefore need to have a long-term plan involving Director assessment and skills/capabilities matching for the changing needs of the organisation.”

Financial services profits come from leveraging other people’s money, remuneration is high and linked to profits, and issues may take years to emerge clearly. Therefore, the Board must closely consider management priorities, decisions, behaviour, and culture.

“Boards are obliged to act in the best interests of the company but in financial services there are other legal and moral obligations to protect the interests of customers,” Mr Laughlin said. “The skills and capabilities of the Board and individual Directors can have profound implications for conduct and culture.” Key capabilities include understanding customer outcomes. Boards must be collegial within a high-trust environment that allows individuals to contest key information. Risk appetite and management must be well understood from the customer’s perspective.

Elayne Grace, Actuaries Institute Chief Executive, said a growing number of actuaries sit on Australian and international company Boards. They bring skills that include objectivity, independence, and good governance, which are part of the profession’s rigorous training.

President Jefferson Gibbs noted that actuaries have strong analytical training and bring those skills to Boards and senior executive ranks. “As businesses become more complex, which is a given, actuarial skills and highly ethical behaviour must come to the fore in managing some of our biggest and most complex corporations.”

Read The Special Needs of Financial Services Boards.

———

[1] The Dialogue is a series of papers written by actuaries and published by the Actuaries Institute. The papers aim to stimulate discussion on important, emerging issues. Opinions expressed in this publication are the opinions of the paper’s author and do not necessarily represent those of either the Institute of Actuaries of Australia (the ‘Institute’), its members, directors, officers, employees, agents, or that of the employers of the authors.

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Ian Laughlin

The Actuaries Institute’s Disability Insurance Taskforce yesterday said there is “real momentum for change” in a sector that continues to face significant financial stress and is subject to close monitoring by APRA.

Release of the Taskforce’s final report into individual disability income insurance (IDII) follows more than 12 months of critical examination of the sector by the Taskforce, spurred by hefty and ongoing losses by life companies whose sale of complex products, ultimately, threatens the viability of the sector. Insurance companies are estimated to have lost more than $2b since 2018.

“Through its work, the Taskforce has developed a path forward for the industry. This will involve change and contribution by the many participants in the IDII ecosystem,” the report said.

“However, there has been very positive support for the work of the Taskforce, and the Taskforce is confident that there now is real momentum for change. The challenge now is to make it happen.”

Led by senior actuary and former APRA deputy chairman Ian Laughlin, the Taskforce’s recommendations reflect consultation and feedback from policy makers and regulators, insurers, consumer advocates, ratings houses, and industry representatives such as the Financial Services Council and others. APRA and the FSC have had observer status throughout the development of the Taskforce’s recommendations and various hearings and seminars have helped formulate the findings.

“The Taskforce set out to have a customer-centric view and to commit to tackling issues from a professional and objective standpoint. The Institute established the Taskforce to analytically assess the many factors at play in the retail disability insurance market and to manage a process where all parties tried to understand the issues and how to improve outcomes for customers,” Mr Laughlin said.

“Nearly everyone we have engaged with and listened to, is aware that change is critical. The challenge now is to embrace the recommendations.”

The Taskforce has supported APRA’s actions in the sector, saying “APRA should maintain the current intervention until such time as industry demonstrates a sustained improvement in practices and outcomes.”

Mr Laughlin said IDII plays a critical role in the Australian economy, providing financial protection against loss of income because of disability and is particularly important for the self-employed and professionals who may have no other support available.

“But the *IDII ecosystem today is not healthy,” he added. Mr Laughlin noted that the Taskforce firmly believes that returning an employee to work at the appropriate time, where this is reasonable, should be a key objective of disability insurance sector reform. To help address its recommendations, the Taskforce developed a ‘Reference Product’ which should be used by insurers and their Boards and executives to assess risk and uncertainty for both customers and the company. As part of this reform template, the Taskforce also developed a Sustainability Guide which is designed to help insurers consider critical aspects of product design, operational practices, pricing uncertainty, risk management and risk appetite. The Taskforce said insurers should use the Guide to continually improve their frameworks, policies and day-to-day practices to mitigate risks and improve long term IDII sustainability for consumers and insurers.

Mr Laughlin said the Institute welcomed APRA’s recent acknowledgement of the role that the Sustainability Guide and Reference Product can play in critically reviewing all aspects of IIDI products, particularly in the areas of sustainability, risk management and contract terms.

Read the Taskforce’s final report.

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Damien Mu

Leading life insurer AIA Australia has welcomed the release of the Actuaries Institute work on the sustainability of disability income insurance, calling it “important and necessary”.

This work has been followed by the release of APRA’s final sustainability measures and expectations of insurers, which AIA Australia supports and will be incorporating into its inflight project of work.

CEO and Managing Director Damien Mu said “We commend Ian Laughlin and the Actuaries Institute Taskforce members for the significant effort that has been made to address the challenges within the disability income insurance ecosystem, and the need for broad structural change. We were pleased that a number of AIA’s people took part in this work in their professional capacity 

“Life insurance is a community good, and we are committed to ensuring the sustainability of our products, in the best interests of our customers and the broader community,” said Mr Mu. 

AIA Australia commenced a program of work in 2019 in response to APRA’s original regulatory intervention; this program is already addressing many of the actions recommended by the Taskforce, including active participation of the board in disability income insurance, and will now incorporate any changes to APRA’s expectations.

Mr Mu said that AIA Australia would be launching a new, sustainable disability income product in the coming months, alongside its existing product set: “We believe moving quickly is important and now that we have been given clarity on the end goal, it is the right thing to do.”

“There is a clear need for simpler products that continue to meet customer needs and deliver value. We echo the comments made yesterday by the Financial Services Council that a new generation of products will deliver ‘availability, affordability and assurance’.

“However, the Taskforce’s recommendations show that the issues inherent in disability income insurance are broader than simply product design, and we all have a role to play in seeking improvements. The detailed ecosystem highlights the important role of financial advice and advisers in helping their clients to get access to the appropriate cover to meet their needs.

“We acknowledge and support APRA’s views, and now it is up to the industry to step up, using the work of the Taskforce and APRA’s latest communication to insurers to move forward. While all organisations will take specific action, we want and need to work closely with advisers, industry bodies including the Financial Services Council, other insurers, and regulators to ensure we can continue to deliver affordable and sustainable disability income insurance to Australians into the future,” said Mr Mu.

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Ian Laughlin

An Actuaries Institute Taskforce has made sweeping recommendations for broad changes to Australia’s retail disability income insurance market to reset sustainability for a sector under threat.

Taskforce Convenor Ian Laughlin said without an overhaul, those who need cover may not be able to afford it in the future and life insurance companies selling individual disability income insurance policies will continue to suffer very large losses. “This is neither in the interests of customers nor the community at large,” Mr Laughlin said.

Mr Laughlin said the sector must offer products that provide more certain outcomes, are more easily understood by consumers with features and prices that better meet their needs.

Taskforce recommendations, circulated widely for stakeholders’ consideration, include a review of the law around life insurance, so insurers can better take into account fundamental changes to the way society views disability and returning to work. It issues a warning that regulators will continue to intervene until the sector shows sustainable improvements in practices and outcomes.

Individual disability income insurance policies provide critical cover for those who may lose their income because of disability. About 850,000 policies are currently on issue, which is an indicator of the importance of the market. But the Taskforce formed the view that “the market is at risk of failure”.

“The lack of sustainability of the disability insurance market is one of the most pressing issues for life insurers today,” said Hoa Bui, President of the Actuaries Institute and a key member of the Taskforce. “We’ve looked at the issues through a consumer lens to find a way forward for all parties,” Ms Bui said.

The report Disability Insurance Income Provisional Findings and Recommendations states “the product has become more and more complex over time, making it difficult for customers to understand and be satisfied with claims outcomes. At the same time, affordability and accessibility for those needing cover is declining.

“Increasingly, those with cover are finding the cost prohibitive, and the more-healthy policyholders are then likely to not maintain cover.”

The report, which includes findings, recommendations, and a paper on the framework for a ‘reference product’ for risk and uncertainty assessment, involved input from over 40 actuaries, and discussions with regulators ASIC and APRA, Treasury, CEOs, boards, lawyers, consumer advocates, claims and underwriting professionals, doctors and financial advisers.

It follows the release earlier this year of a KPMG research paper, commissioned by the Actuaries Institute, that found life companies lost $3.4 billion over five years by selling complex products to individuals, which ultimately, threaten the viability of the sector.

The Taskforce has not taken into account the likely negative impact of COVID-19 on future claims.

Outcomes the Taskforce hopes to achieve after further industry input include:

• product features, underwriting and claims practices that promote closer alignment between consumers and providers of insurance;
• stable prices over time;
• sustainable outcomes for insurers; and
• community confidence around fairness and the enduring value of the insurance.

A failure to bring about reform would result in loss of productivity in communities, a rise in demand for community and family-based support, increased social security costs and, for those who need support, a decline in mental health, a loss of confidence and self-worth.

Recommendations include:

• insurers gain better insights into customer claims experience;
• simpler and cheaper products with a focus on return to health and work;
• strong controls over the level of benefits paid;
• products that can be updated to allow for advances in medicine, technology and society’s expectations;
• sustainability heat maps and a review of Board composition to ensure risks are understood and managed;
• clear examples of best interest duty and changes to product ratings; and
• standardised collection of medical information and better underwriting and claims data.

“The Taskforce strongly believes that the problems are more deep-seated and diverse” than just product terms and conditions, Mr Laughlin said, adding CEOs believe the product has lost the principle of indemnity, and said there was too much capital invested in a market with a relatively small base. Boards may not receive the right analysis to allow directors to understand the extent of long-term guarantees and risks.

Mr Laughlin said loss minimisation, a feature of many other insurance contracts, is not explicitly expressed in disability income insurance contracts. Should those making claims have a duty to return to work as soon as possible to minimise benefits paid to them, especially where a return can aid recovery?

He said the rise in mental health claims and community expectations around return to work rates are not easily accommodated, and Treasury and APRA should review the 1995 Life Insurance Act to test whether it remains fit for purpose.

The next steps include stakeholder and industry feedback. Consultations close on October 31.

Read the full paper.

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Ian Laughlin

Highlights

• The Hayne Royal Commission showed institutions have failed to understand and manage relationships with society and their associated social risks.
• This has resulted in great reputational damage and loss of social capital for those institutions.
• ‘Social condition’ is as important as ‘financial condition’ to the success and sustainability of an institution.
• The authors propose an annual Social Condition Report (SCR), in concept like the Financial Condition Report mandated by APRA.
• Boards, management and regulators would benefit from the Social Condition Report.
• The authors have written a mock SCR for a hypothetical major Australian bank.

Australia’s major financial institutions, many of them excoriated during the Hayne Royal Commission for their treatment of customers and other stakeholders, need to better understand their social risks and the social condition of their business.

In a major Dialogue* paper prepared for the Actuaries Institute, authors Ian Laughlin, a former deputy chair at APRA, and Hadyn Bernau, a principal at Finity Consulting, said the ‘social condition’ of a financial services business – the state of its relationships with its customers, employees, regulators, intermediaries, politicians and the wider community – is “no less important to a company’s long-term success than its financial condition”.

“The basic premise underlying this paper is that relationships with key groups in society are so fundamental to the success of a financial services business, and of such great value, that there should be a systematic approach to the management of those relationships,” the paper states.

“Financial services companies should commission a formal Social Condition Report to aid Board and management in their respective duties.”

The paper argues that management and boards often have a poor understanding of their relationships with the social groups with which they have relationships. “Those relationships are often quite poorly managed and nowhere near as strong as the organisation (and other parties) would desire.”

Social and relational events can quickly destroy significant business value. And “pedalling a lot harder” at the same tasks to correct deficiencies, including being more diligent, working harder, applying more resources, and improving reporting in the post-Royal Commission world, isn’t good enough. “We are sceptical about the effectiveness and efficiency of such responses,” the authors said.

Many social risks are being “poorly managed – perhaps not even being identified”. The paper states: “it is common for assessments of the current level of a risk (of whatever type) to be based on backward-looking measures – and this can give a very poor indication of the actual risk profile”.

The Social Condition Report concept is broadly modelled on the mandatory Financial Condition Report, a report highly valued by insurance company boards and APRA because it provides a comprehensive view of the financial dynamics of complex businesses.

The Social Condition Report could be as valuable for boards, ASIC and APRA because of the insights it will provide into the quality of the relationships with society, and the risks to those relationships.

Poor experiences observed in financial services, over a number of years, prompted the paper, which includes a proposal for the way in which financial institutions can systematically and rigorously measure and report on the quality of their relationships with key social groups.

The findings of both APRA’s Prudential Inquiry into CBA and the Hayne Royal Commission have reinforced the views of the authors. The proposal for a Social Condition Report provides a tool to help institutions respond.

The concept of a Social Condition Report includes identifying key groups and relationships, assessing and measuring the quality of those relationships and the risks to those relationships in the context of the board’s appetite for risk.

It involves a comprehensive and integrated assessment, and it would propose specific actions and defined objectives for management.

Placing a value on relationships is challenging but measuring social goodwill is possible. The paper proposes methodologies for doing this and gives examples. This includes the use of artificial intelligence and a structured system for assessing relationships on various dimensions.

“The Actuaries Institute is very supportive of this kind of thought leadership to address broader risks in our industries,” said Institute Chief Executive Officer, Elayne Grace.

Mock Social Condition Report

To illustrate their thinking, the authors have prepared a mock Social Condition Report for General Banking Corporation (GBC), a fictitious company, which is intended to be a major player in financial services in Australia. It can be accessed here.

Below is a simple extract from the mock report, a table showing the Social Goodwill Measure.

The Social Goodwill Measure is a weighted average measure of the quality of relationships across all key social groups (KSGs). The weights given to the various KSGs are based upon their relative strategic significance to the ongoing ability of GBC to achieve its purpose and execute its strategy.

This measure is useful for assessing the overall quality of the relationships in absolute terms, for tracking changes over time and for assessing the consequence of interventions to improve relationships.

A full copy of the paper is here.

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