Insurers’ boards are dealing better with risk management, but much work still needs to be done, according to Australian Prudential Regulation Authority (APRA) Executive Member Ian Laughlin.

APRA has focused on insurers’ risk appetite statements over the past year in an effort to improve standards and get boards more engaged in how companies set their risk acceptance.

Mr Laughlin told an Australian and New Zealand Institute of Insurance and Finance conference that many boards have been engaged in risk appetite work and the statements have improved markedly.

He says risk appetite is a foundation stone for sound risk and capital management.

Although risk appetite is often looked at through the eyes of shareholders, he says APRA is primarily interested in policyholders and depositors.

While the risk management interests of shareholders and customers are often aligned, sometimes they may be at odds.

“The board and management need to explicitly consider the interests of customers in their risk appetite thinking,” he said.

Mr Laughlin says an organisation’s risk appetite statement must express itself clearly and unambiguously in a way that generates a common understanding and consistency across the business.

He notes two approaches are being used, with some companies producing a fairly succinct document with clear boundaries for major risk areas. Mr Laughlin says to be effective this type of document must have clear links to risk tolerances captured in other documents.

In the second approach, the statement is much longer and more comprehensive, providing the high-level perspective and details of tolerances for day-to-day business purposes.

Mr Laughlin says the translation from appetite to tolerances can be a challenge because various audiences, different parts of the business and all major risks must be encompassed.

Practical information about interpretation of appetite and tolerances should be shared and compared across business units and across types of risk so inconsistencies can be addressed.

The information can then be fed back to the board to decide whether the tolerances are consistent with risk appetite.