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Wednesday, August 14, 2019 - Allianz slapped with new capital requirements over risk governance
Allianz
Source - https://www.afr.com/companies/financial-services/allianz-slapped-with-new-capital-requirements-over-risk-governance-20190814-p52gwo
Where - Australia
Cost - 250,000,000 AUD
Business line - Corporate Services

Insurance giant Allianz has become the fifth financial institution to be forced to raise its capital reserves over concerns about the company's risk governance.

The Australian Prudential Regulation Authority revealed on Wednesday it had raised Allianz's capital requirements by $250 million, as a result of a governance risk self-assessment provided to the regulator last November.

It comes after APRA made similar demands of all four major banks, requiring Commonwealth Bank of Australia to raise an additional $1 billion, and ANZ, NAB and Westpac each to raise an additional $500 million.

APRA said the new capital requirements would remain until Allianz completed "remediation work underway to strengthen risk management, and closes gaps identified in its self-assessment".

In total, 36 financial institutions provided APRA with risk governance self-assessments. So far only Westpac and NAB have published theirs.

Westpac's self-assessment, released last month, painted a picture of an organisation mired in bureaucracy, with a tendency towards complexity, an over-readiness to form committees, and a workforce that tended not to speak up.

Top of the list of criticisms was what the report's authors called an "organisational tendency to cultivate complexity", followed by a "a tendency to privilege upfront conceptual work over execution and implementation", and an "organisational imperative for safety".

CBA did not do a self-assessment because it was the subject of an earlier review by APRA that was made public. ANZ was the only big four bank not to publish its self-assessment.

APRA executive board member and head of insurance, Geoff Summerhayes, said the risk governance self-assessments "not only demonstrated that the issues identified in the CBA inquiry exist beyond that institution – they also go beyond the banking sector".

“Last financial year, APRA-regulated general insurers paid out $27.5 billion to their policyholders. With Australians relying on these policies to financially protect them when things go wrong, it’s essential that insurers have in place appropriate internal processes to honour those commitments.

“By imposing this additional capital requirement, APRA is providing a financial incentive for Allianz to quickly and effectively implement its planned remediation work. We also want to send a message to the broader insurance and superannuation industries that APRA expects the same high standards of risk management, including for non-financial risks, as we do for the banks,” he said.

Responding to APRA's announcement, an Allianz spokesman said: "Allianz has a comprehensive program of work arising out of the Risk Governance Self Asessment and will continue to work with APRA in relation to this." He did not to respond to questions over whether the insurer would follow Westpac and NAB in making its self-assessment public.

Allianz's appearance at the insurance round of the Hayne royal commission last year revealed serious compliance failures. Two witnesses showed that the company was operating in breach of prudential standards and failed to report many breaches to the corporate regulator, as required by law.

It was also revealed that the company had a history of commissioning reports from consultants such as EY and Deloitte and then demanding changes be made to the reports or asking for them to be withdrawn entirely when they didn't like the results.

APRA requested the 36 banks, insurers and superannuation funds conduct the self-assessments last year, after a landmark investigation into CBA's culture uncovered widespread complacency, overconfidence, excessive complexity and insularity.

Announcing its findings from the self-assessments in May, APRA deputy chair John Lonsdale said: “Although the self-assessments raised no concerns about financial soundness, they confirmed our observation that industry is grappling to manage non-financial risks, such as culture and accountability.

“The self-assessments provided valuable insights into the depth and totality of issues, and how institutions were addressing them. It was also interesting to observe the generally positive assessments boards and senior leadership teams had of their own performance, even when they had identified serious weaknesses in their institutions.

“It was not always evident that institutions clearly understood the drivers of their findings. Therefore, there is a risk that any planned action to address weaknesses may not be effective or sustainable.”