After many years of development and engagement from APRA with insurers and the Actuaries Institute, new capital standards for Private Health Insurance (PHI) are just around the corner, coming into effect on 1 July 2023.
The changes improve the consistency of APRA’s insurance capital framework between PHI and Life and General insurance. This includes the requirement for private health insurers to prepare an Internal Capital Adequacy Assessment Process (ICAAP).
The Actuaries Institute hosted a session chaired by Linda Kemp to provide health actuaries the opportunity to hear from General Insurance (GI) actuary Francis Beens and Life Insurance (LI) actuary Raymond Bennett as they shared insights and learnings from the implementation of ICAAPs in their respective industries. Also on the panel was Health actuary Anthony Joyce who provided some helpful tips for other Health actuaries as they navigate their own ICAAP implementation process.
Learnings from GI
Francis commenced the discussion by providing learnings from his experiences in GI implementing ICAAP. Initial feedback from APRA to General Insurers indicated that an ICAAP should provide commentary on expected versus actual capital outcomes, detail changes in risk profiles, identify drivers of future capital needs and provide evidence that outcomes from stress testing are utilised in the decision-making processes of the organisation. By taking on board the initial feedback from APRA, Francis observed that the ICAAP had many benefits on the GI industry, including:
- Improved ownership, management, and accountability of capital performance,
- Active engagement of senior management and the board on capital matters,
- Better articulation of the risk appetite and understanding of the linkages between risk profile and capital requirements within the organisation,
- Embedding ongoing scenario and stress testing throughout the year to assist with business decision-making.
Learnings from LI
Raymond continued the discussion by covering his learnings on ICAAP implementation and associated operational considerations. While Raymond outlined it is a requirement for the ICAAP process to be operating continuously, this may require significant changes in business processes and resources that may be challenging for some smaller insurers to implement effectively. Raymond stressed that the ICAAP should be developed to meet the requirements of the business, not the requirements of the Prudential Standard. The linkages between the ICAAP and the Risk Management Framework were discussed along with the requirement for the ICAAP process to be adaptable to change over time alongside changes to the organisation and its capital needs. Raymond also emphasised the need for an independent review of the ICAAP (either by internal or external audit), and for allowing sufficient lead time during development to allow for this review.
Tips for Private Health Insurers
Anthony continued the session by discussing the key messages from APRA Executive Board Member Suzanne Smith’s speech on APRA’s priorities and expectations for Private Health Insurers as they prepare their first ICAAP. While APRA doesn’t expect a perfect ICAAP on the first attempt, APRA does expect Boards to have ownership, engagement with and challenge of the ICAAP and a suitable understanding of the organisation’s capital needs. Central to this is evidence of a clear link between the ICAAP and the insurer’s risk management framework. This could include the ICAAP specifically referencing key risks identified in the risk management framework and the insurer’s risk appetite for these risks. Anthony then continued by sharing his tips for implementation for other Health Actuaries, including:
- Leveraging existing processes for the preparation of the Capital Management Plan (CMP),
- Ensuring consistency with the Recovery and Exit Plan,
- Being able to demonstrate Board engagement to APRA (for example through Board meeting minutes),
- Appropriately developing modelling and stress testing capability to support the requirements of the ICAAP,
- Allowing time for an independent review of the draft ICAAP summary statement.
During the Q&A the audience posed interesting questions for the panel to consider.
One audience member asked the panel “What does good Board engagement with the ICAAP look like?”
The panel generally agreed that engagement is evident when the Board has a say in the scope of what stresses and scenarios are tested in consultation with senior management, has strong input into what management actions to test, and when scenario outcomes are presented assumptions and management actions are also tested by the Board. An example was given of Boards war-rooming and role-playing through some of the scenarios in the ICAAP. Similarly, it was asked where leadership responsibilities for the preparation of the ICAAP best sit within an organisation. Francis and Raymond suggested that responsibilities would best align with the CFO or the Chief Actuary and observed that while the CRO may own some policies in the organisation which overlap with the ICAAP, in their experience Finance and Actuarial functions typically will work on its production.
A further question from the audience that was put to Francis and Raymond asked if the tools, frameworks, and scenarios for stress testing changed when ICAAP came in for LI and GI. Raymond indicated that for LI the ICAAP resulted in increased focus and development of new tools alongside a slightly different approach to thinking about capital. Francis presented an interesting insight for GI, suggesting that the ICAAP levelled the playing field between insurers as smaller insurers who previously had underdeveloped modelling capability now had to make large leaps and bounds to comply with the ICAAP, bringing all industry participants up to speed with best practice.
A consistent theme of the learnings that emerged from Raymond and Francis is that the ICAAP should not be a tick-box compliance exercise, but a living, breathing document undergoing continuous change and improvement. An ICAAP should develop over time alongside changes to an organisation’s capital needs. Implementation of an ICAAP for health insurers and the associated Board ownership provides an important opportunity to ensure senior management are actively engaged on capital considerations and for scenario and stress testing to inform strategic decision-making.
While ICAAP is a new regulatory requirement for the PHI industry, a key takeaway from the insights session is there is no need to panic! Health insurers will not be starting from scratch. While the ICAAP and the Recovery and Exit Plan cover different stages of the Crisis Continuum, there is an overlap in the requirements of both documents. Health insurers will be able to leverage the overlap in requirements for stress testing and scenario planning for improved efficiency during the implementation phase. Health Insurers also currently have a Capital Management Plan (CMP) in place which will already be satisfying some requirements of the ICAAP with some small modifications.
And perhaps most importantly, Health Insurers have the added benefit of learning from the APRA feedback and ICAAP implementation experiences for Life and General insurers!
CPD: Actuaries Institute Members can claim two CPD points for every hour of reading articles on Actuaries Digital.