Insurers should introduce a new annual review to prevent the social and reputational risks highlighted by the Hayne royal commission, an Actuaries Institute paper released today says.

It says relationships with key groups are as critical as any financial services company’s financial condition, and the subject should be given more boardroom focus through an annual social condition report, the discussion paper says.

The concept is broadly modelled on the Financial Condition Report mandated for insurers by the Australian Prudential Regulation Authority (APRA).

“Our basic argument is that relationships [with key groups] are of great value and really there isn’t enough attention given to them,” report co-author Ian Laughlin – a former deputy chairman of APRA – told insuranceNEWS.com.au.

“There is certainly not a systematic approach to understanding and managing those relationships.”

The paper says the response of various markets to unfolding events at the royal commission graphically demonstrated how social or relational events can destroy business value.

The proposed report could also be used by the Australian Securities and Investments Commission (ASIC), which has been tasked with taking a more active role in driving a positive financial services culture.

“Our starting point is that this makes sense for the board, and ideally would be driven by the board, but it would also be of considerable value for ASIC in particular, but also APRA,” Mr Laughlin says.

A mock social condition report, released with the report and based on a fictional bank, uses signal analysis and relational analytics to provide a systematic approach for assessments that can be tracked over time

The report, co-authored by Finity Consulting Principal Hadyn Bernau, has been produced as part of The Dialogue series, published by the Actuaries Institute to drive discussion on important emerging issues.

Under the proposal, the quality of relationships and risks to them is considered for customers, employees, suppliers and partners, shareholders, regulators, politicians, the media and other members of the public.

“In a sense, relationships are the arteries and veins through which culture travels,” the report says. “Cultural change happens through interpersonal connections and is therefore much easier, faster and more effective when the connections are strong, with less resistance encountered.”

Mr Laughlin says the approach could provide an early warning indicator before issues blow up, with current risk assessment methods commonly based on backward-looking measures.

“The board would be able to see where problems are emerging and are likely to emerge and therefore could take pre-emptive action, and that is really what is important,” he says.