A principles based approach gives firms the upside of flexibility, but it also comes with the downside of interpretation and certainty. So when political messaging on several fronts calls for a sifting out of those elements of regulation deemed less valuable for present goals, it looks very much like that flexibility becomes even more useful, but that interpretation and certainty becoming even more difficult.
‘Shifting sands’ seems to be the most suitable description then for the environment in which governance, risk management and compliance people are working.
Yet how effectively can any sifting of principles based regulation really be? After all, principles based regulation focusses on outcomes. What principles do you no longer want, or want less of? What would allowing a little less fair outcomes or a little more bias look like in practice? And how would an insurer reset its governance levers and dials to deliver this?
Just Like Jenga?
It feels like a game of jenga, with its tower of blocks, one being removed at a time with the hope that the whole lot won’t collapse on you. And while many of us will have enjoyed playing that game at some point, what we will remember about it is that as the game went on, success or failure depended on you having a very good all round appreciation of the tower as you eased one block out, watching for that wobble.
With the firm as the tower and the withdrawal of a block as the recalibration of a risk or compliance commitment, the big problem is that few if any people have a sufficiently good all round appreciation of their firm, with commensurate powers to act. This means that wobbles induced by the aforementioned recalibration could go horribly wrong before anyone is able to notice and respond. After all, shifting sands aren’t good for the wobble risk.
Let’s leave the jenga analogy behind now. In the real world of insurance and the shifting sands of principles based regulation, how does a firm frame its response? Here are some things for you to weigh up.
Some Things to Weigh Up
A lot depends on how an insurer’s approach to governance engaged with principles based regulation. The latter was meant to encourage thinking and build understanding on key conduct themes and embed what came out of this into what the firm did with its governance, for example through things like purpose, values and risks.
Those insurers who engaged in this way are likely to stick to it. For sure, they will look for ways to make things run more smoothly, less onerously, but still within the same purpose, culture and values. Those who didn’t engage in this way (in other words, created their own rules out of the principles) will have a lot more work to do, to avoid that aforementioned wobble risk.
Be careful not to fall into the trap of thinking that dialling down on regulation will de facto lead to more innovation and growth. This week’s news about DeepSeek is a classic example of the inter-relationship between innovation and the challenges that shape opportunities.
This leads on to culture and its acceptance of challenge. In a changing world for regulation and governance, to what degree does your firm’s culture facilitate and utilise challenge from within? Unless you have someone who understands everything about their firm (and who does?!), there needs to be an acceptance of different viewpoints and the skills to draw them together, rather than push them away. This enables recalibration opportunities and consequences to be better understood and managed.
Like culture, purpose and values should be seen as opportunities, not as hurdles or obligations. If the sector’s growing realisation of climate change impacts tells insurers anything, it is that these things are there to guide strategies, not to get in their way.
Keep your eyes on the weakest link – the one with the capability to bring the jenga tower down earlier than expected. In my opinion, a particularly weak link is the often inadequate handling of conflicts of interest within the three lines of defence model. It is masking a lot of what is actually going on.
Remember that politically influenced regulatory recalibration does not mean that other stakeholder expectations will gone away. If anything, they are likely to become stronger, and targeted at more ‘behind the scenes’ layers of political influence.
To Sum Up
Shifting obligations are not that much different to shifts in markets. They're part and parcel of the modern business environment. What marks out a firm’s ability to deal with them is, firstly, how it’s been using its own principles to shape and guide the various layers of its governance culture; and secondly, the ability to draw on a good overall understanding of what the firm does and why.
To me, what is needed is not less complexity for insurers, but less complicatedness. Complexity is part and parcel of the sector now. Complicatedness is home grown, and insurers should use their purpose, culture and values to work with less of it.
