One of the paper’s authors, Barry Ruff (pictured above), a former president of the Institute of Actuaries, said their research has been lauded as chiefs of large insurers are looking for insights into how to hire new managers.
“The help we’ve provided actually gives them a good checklist to work on, and it also gives them some legitimacy and justification as to why they should hire a manager from broader fields than just direct insurance or your traditional line manager.”
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Raff, who is also the director of Rafe Consulting, said the research found that the traditional method of hiring managers using a skills matrix is not enough.
“What we found is that this is actually not enough [because] The skills and abilities are different. You need the skill, like a financial skill or a technology skill, but you also need the ability to apply that as a manager and so what we’ve identified is that there really is a difference,” he said.
Raff said their examination of financial services organizations, including annual reports, found that they did not delve enough into what is required in a capable manager.
Co-author, Ian Laughlin (pictured below), former deputy chair of the Australian Prudential Regulatory Authority (APRA), said the report’s conclusions apply to the insurance industry and across the financial services sector.
“I think there are definite differences in the skill set between a banker and an insurance company. In fact, in the paper we mention that understanding the assets side of the balance sheet, for example, with banks is really important and understanding the liabilities side of insurance companies is really important. But basically, with Having so many skills and especially abilities, there is no difference between insurance and banking,” said Laughlin, who is also a principal at PFS Consulting.
Many of the report’s conclusions came after road-testing ideas with several members of the company’s board of directors. The duo also received insights from a panel discussion hosted by the Institute of Actuaries featuring current and former directors. One of the surprises of this discussion, Raff said, was the issue of “golden jobs” and the tendency to appoint people to boards with an impeccable track record.
“What one of the panelists said is that what you’re really missing is the opportunity to hire managers who have already gone through the fire, who are already involved in the work and so can see the signals.”
Another interesting observation by the committee, Raff said, was the question of how each industry developed its own language.
“One director talked about how insurance gets this bouncing bonus and the ultimate bonus language, and what the language does is potentially including poor product design. So, he said, you actually need managers from different industries who speak different languages and that way they test the assumptions that were made in meetings board about how things work,” Raff said.
Laughlin and Raffy said their research also shows that while the financial services business is complex, you don’t need every manager to understand the specifics or complexity of financial statements.
“You don’t need to know that to know that products are bad. You really need managers who also understand the expectations of society more broadly, not just detailed financial statements,” Raff said.
According to their report, a panellist in the discussion also emphasized that there were two core capabilities in insurance namely claims management and underwriting and that these capabilities were missing on the boards of major life insurers. The spokesperson indicated that these factors had contributed to the emergence of bad claims experiences.
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The Board Assessment Assistance at the end of the Rafe and Laughlin report provides an example of a matrix of skills and abilities that can be adapted for selecting board members for insurance industry companies. The matrix includes illustrative skills and abilities to highlight how it works. Skills include “financial literacy” and “risk management,” while abilities range from “business and financial acumen, insight, and strategic thinking” to “social awareness and insights.”
Raff said the response from across the industry, including from regulators, has been very positive. However, Laughlin doesn’t expect everyone to agree with their conclusions.
“Obviously we haven’t engaged the entire community of directors and there will be people who will disagree with what we’re saying, no doubt, but it’s going to be a very boring paper if you don’t get some disagreement because what we’re doing is challenging the status quo.”