Optimisation of the SIMR: Combatting "groupthink" in the insurance industry?

​The PRA’s policy statement PS1/18 confirms that by 09 April 2018 insurers will be required to have a diversity policy for their boards, following its June 2017 consultation (CP8/17).


The Prudential Regulation Authority (PRA) requires all Solvency II insurers and large non-directive firms1 (NDFs) to strengthen governance by having a board diversity policy in place by Monday 09 April 2018 in an effort to promote diverse board composition. The requirements were set out in CP8/17 back in June 2017 which proposed amendments and optimisation to the Senior Insurance Managers Regime (SIMR). The PRA recently published policy statement PS1/18 in February 2018, confirming the diversity policy proposal.

Firms will be required to consider a broad set of qualities and competencies when recruiting board members, in the hope an increasingly diverse governing body will improve the effective running of not only the board but of the firm and ultimately lead to better protection for the firm’s policyholders. Firms will, however, have full discretion to determine the details of their diversity policy; the PRA acknowledges that areas requiring greater representation will vary between firms.

Do these requirements go far enough to promote diversity within the industry? With the extension of the Senior Managers & Certification Regime (SMCR) to insurers in 10 December 2018 there is concern that the increase in individual accountability under the SMCR could lead to a reduction in the talent pool, ie fewer people within the insurance industry may be willing to take on the additional personal risk. Industry initiatives towards not only diverse boards but a diverse workforce will, therefore, need to continue. This will mean not only seeking to recruit diverse talent at board level but at all levels of firms.

Only when the industry truly reflects the diverse society it works to equip is it likely firms will function effectively. This includes relating to different customers’ needs, providing relevant innovative solutions and attracting and then retaining, supporting and promoting diverse talent within firms.

Extension of SMCR Regime

HM Treasury has recently announced that the extension of the SMCR to insurers will come into effect on 10 December 2018 increasing individual accountability at all levels of firms.

The PRA proposes to extend the SMCR through amendments to the SIMR. The final rules setting out the extension of the SMCR to insurers are due to be published this summer 2018. You can access our top ten things insurers need to know about the SMCR here for further detail about the new regime. The most significant changes for insurers include:

  • application of conduct rules to all staff (apart from ancillary staff), a failure to meet the required standards may lead to enforcement action being taken against the relevant employee. New notification requirements will apply to firms when a member of staff has acted in breach of a conduct rule

  • introduction of a new certification regime whereby firms will have to assess on an annual basis those persons carrying out Certification Functions are fit and proper to carry out their role

  • more senior management functions (renamed S(I)MFs) and a longer list of prescribed responsibilities

  • introduction of the "duty of responsibility" for S(I)MFs, and

  • requirement for handover notes for persons taking over S(I)MF roles.

The SMCR is to be applied proportionately with the full regime applying to UK Solvency II firms and large NDFs. A "streamlined" SMCR regime will apply to other insurers including small NDFs and Insurance Special Purpose Vehicles (ISPVs). There are also some variations in the application of the regime to UK branches of EEA and non-EEA insurers and reinsurers.

The industry is concerned that the increase in personal accountability under the SMCR will see people turning away from the sector and lead to a shortage of talent. This could have huge implications for diversity within the insurance sector, as those willing to take on the additional risk will be recruited from a decreased talent pool.

A decreased talent pool might mean greater scope for “groupthink” to permeate the industry, as individuals seek to use collective responsibility as a mechanism of individual protection (ironic given the intention of the SMCR is to do the opposite). Therefore, a diverse workforce, both in terms of measurable factors such as gender, age, tenure and race and also in terms of approach, skills and experience, is more important than ever, in order to combat groupthink and ensure prudent and effective running of firms and the industry as a whole.

Focus on culture and diversity

PS1/18 sets out various changes to the SIMR. One of those changes requires Solvency II firms and large NDFs to have a board diversity policy in place from 09 April 2018. Although respondents to the initial Consultation Paper (CP) valued the regulator’s focus on diversity, one of the respondents commented the requirement to promote diversity on the board alone did not go far enough.

Neither the SIMR nor the incoming SMCR include an express prescribed responsibility for promoting diversity. The PRA instead has and continues to focus on the promotion and development of a firm’s culture through the prescribed responsibilities. A positive, inclusive culture is key to the overall success of firms and well-being of staff, but the opportunity for the regulator to show a clear commitment to encouraging diversity at all levels of firms has been missed.

In addition, neither the diversity policy requirement nor the prescribed responsibilities in respect of culture apply to firms other than those subject to Solvency II and large NDFs. This is disappointing, given there is a clear lack of diversity amongst co-founders and the senior management of Insurtech start-ups in the market.

The insurance market is known for being highly relationship driven, which can contradict an inclusive and diverse culture when not kept in check. According to data released last week by the Association of British Insurers (ABI), despite the majority of insurers (some 80%) having diversity strategies in place, only one in five top jobs are held by women. At entry level, 55% of positions are held by women, but at executive and board level, this is reduced to 21%. The data also highlighted that only 16% of the sector’s workforce are black, Asian or ethnic minority.

The new requirement for a board diversity policy also comes at the same time as the deadline for mandatory gender pay gap reporting. Companies with 250 or more employees must report their gender pay gap figures by 04 April 2018. (Please see here for further information). So far, only around 1,600 out of the 9,000 total firms affected have reported their figures, and only 64 of those are in financial and insurance activities. The figures will likely reveal significant differences in pay between men and women in the insurance industry and confirm the lack of women in senior roles. This may well provide the impetus for many firms to effect change.

The industry has embraced diversity and inclusion over recent years with the likes of  Inclusion@Lloyds and the "Dive In Festival" as it battles to attract and retain talent and compete with Insurtech disruptors and other sectors. The industry knows that diversity and inclusion at all levels improves business performance; customers want and expect service providers to be representative. However, the recent #metoo campaign has emphasised there is still a lot of work to be done not just in insurance but in business more generally.

If firms are struggling to retain and promote women to senior management positions a lot more needs to be done to ensure the insurance industry is attracting and supporting a truly diverse workforce.

1 A firm where the value of its assets for all the regulated activities it carries out exceeds £25,000,000

This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.