Looming reforms to remuneration practices mean insurers would need a “full rethink” of how performance-based incentives are awarded, according to actuarial consultancy Finity.

The proposed changes, as recommended by the Hayne royal commission, will impact the employment arrangements of almost everyone working in the industry.

“Every insurer will need a full rethink of its performance pay system. This is not a small undertaking,” Finity says.

“There will need to be a new governance process for remuneration for many companies.

“New work for the board remuneration committee will include the need to consider more information, individual review of bonuses for key individuals, category-based review for all staff and an annual compliance approach.”

Finity does not rule out morale taking a hit from the impending reforms.

“From the start of the royal commission, a major challenge for management has been to support the workforce – to keep people focusing on the job at hand and to avoid the despondency and loss of confidence that can come from continuing external criticism,” the consultant says.

“If you work for an insurer, this reform could well impact you personally and your work colleagues. All these people are individuals with egos, families, mortgages, legal rights and rights to privacy.”

The proposed reforms call for, among other things, restricting financial metrics to no more than 50% of performance criteria for variable remuneration.

The Australian Prudential Regulation Authority (APRA) has proposed a new prudential standard on remuneration and is seeking submissions.

“A key feature of APRA's new standard is to promote the use of non-financial performance criteria in designing variable remuneration incentives,” the prudential regulator says in the consultation paper.

“Some of the measures APRA is proposing will require changes to existing remuneration practices at some cost.

“These trade-offs should be viewed in light of the need for a substantially stronger remuneration framework that provides appropriate incentives, improves accountability and that supports effective management of financial and non-financial risks and long-term soundness.”

APRA will publish its response and final prudential standard by early next near after consultation closes on October 23. It expects the new CPS 511 standard to kick in on July 1 2021.

Click here for the consultation paper.