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May 2019

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Australia: Actuaries urge financial institutions to heed their social condition

Source: Asia Insurance Review | May 2019

Australia’s major financial institutions, including insurers, need to understand their social risks and the social condition of their business better.
 
In a paper prepared for the Actuaries Institute, authors Mr Ian Laughlin, a former deputy chair at APRA and Mr 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 authors propose that financial institutions produce an annual Social Condition Report (SCR), in concept like the Financial Condition Report mandated by APRA. The SCR 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.
 
The authors said, “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 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”.
 
Social Condition Report
The concept of a Social Condition Report includes identifying 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.
 
“The Actuaries Institute is very supportive of this kind of thought leadership to address broader risks in our industries,” said Actuaries Institute CEO Elayne Grace. A 
 
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