The proposal forms part of a package of "amendments and optimisations" to the Senior Insurance Managers Regime (SIMR), which came into force last year. It is designed to complement existing initiatives to promote diversity on financial services industry boards, and to tackle the 'groupthink' among board members that emerged during the financial crisis, the PRA said.
"More effective challenge and including a broader set of perspectives should help boards to identify a wider range of risks and be better positioned to understand their impact, in turn providing greater protection for policy holders," the PRA said in its consultation, which closes on 22 September.
"Although diverse board composition is not on its own a guarantee of board effectiveness, one of the ways in which challenge can be encouraged and be more robust is through having sufficient diversity of approach, skills and experience on the board, so that potentially complex and technical issues can be thoroughly probed and discussed," it said.
The consultation also proposes the introduction of a new 'chief operations' SIMR function, defined as "the most senior individual responsible for managing the internal operations and technology of a firm". Insurers would also be required to designate named senior managers as responsible for 'outsourced operations', and for any sufficiently large and complex 'key business areas' within the business.
Large firms would also be required to separate the chair and chief executive roles, as is already required of banking firms under the Senior Management Rules (SMR). An exemption would exist for smaller firms, defined as those with annual premium income of less than £1 billion and total assets of less than £10 billion over each of the previous three financial years.
The consultation "indicates a move towards a more homogenous approach as between SMR and SIMR, which is particularly relevant given the 2018 extension of SMR to all FSMA firms including Solvency II insurers", said financial services employment law expert Steven Cochrane of Pinsent Masons, the law firm behind Out-law.com.
"For example, the strong focus on technology and operational risk echoes much of what has already been said by the Financial Conduct Authority in relation to SMR implementation," he said.
"From an equality and diversity perspective, the proposals are unsurprising but very welcome. The connection between 'groupthink' and conduct risk is an obvious one and has been the focus of a number of reports and initiatives such as the HM Treasury Women in Finance initiative; the Parker Review, which looked at ethnic diversity on boards; and of course the FRC's UK Corporate Governance Code. In a sense, the PRA's proposal to mandate a c-suite diversity agenda is evolution rather than revolution and augments various other measures already in train within this space," he said.
The proposal would require the largest insurers to put a policy in place to "consider a broad set of qualities and competencies" when recruiting board members, and to have a policy in place to promote diversity among board members. It would be up to the firm to put the most appropriate policy for its circumstances in place. However, the policy should be "specific to each firm, robust, set out the actions that are likely to promote greater diversity in the future, and be reviewed regularly by the board", according to the consultation.
"The PRA's proposal is to be welcomed," said Jacey Graham, co-founder of Pinsent Masons' diversity and inclusion consultancy Brook Graham. "The insurance industry in general has been 'behind the curve' in addressing this issue, although I am encouraged by the work being done now by our clients in this sector, especially on gender diversity. The focus also needs to be on diversity in executive committees, however, for the industry to truly change and reap the business benefits."
The SIMR is designed to make it easier for the regulators to hold senior individuals at insurers personally accountable for failings on their watch. It is based on the SMR, which is applicable to banks, building societies and designated investment firms; but is tailored to the different business models of insurers and their associated risks. However, the SMR will be extended to all financial firms regulated under the Financial Services and Markets Act (FSMA), which includes the largest insurers, next year.
The rules apply to senior managers who are running insurance companies, or who have responsibility for certain 'key functions'. These initially included risk management, compliance, internal audit and actuarial, with additional functions covered based on their importance to the sound and prudent management of the individual firm. The rules cover the assessment of fitness and propriety of senior managers, the allocation of certain responsibilities to those individuals and new conduct rules.
The PRA intends to publish final rules on its proposed extensions to the regulated key functions, as well as the diversity requirements, towards the end of 2017. The rules would then be implemented two months after their publication, it said.