The operational risk management regulation described by some stakeholders as an insurance industry “game changer” and “turning point” has come into force. On Tuesday, CPS 230 became the Australian Prudential Regulation Authority’s (APRA’s) newest prudential standard impacting financial services, including brokerages.
“Under CPS 230, banks, insurers and superannuation funds will need to be well-prepared to ensure continuity of critical services and respond to business disruptions,” said APRA’s media release.
APRA member Therese McCarthy Hockey (pictured) agreed to answer questions from Insurance Business about why this standard is important for insurers and brokers.
“CPS 230 is a cross-industry prudential standard so it’s aimed equally at insurers, banks and superannuation funds,” she said. “The biggest change from previous requirements in this area is that CPS 230 introduces the concept of ‘material adverse impact’ for customers.”
McCarthy Hockey said under the new standard, regulated entities are responsible for the continuity of service delivery to the customers that rely on them.
“Responsibilities extend beyond their own critical operations to those of their material service providers,” she said. “In short, APRA-regulated entities must not only identify their own operational vulnerabilities and have plans to mitigate them; they must have a clear understanding about their most critical third-party service providers.”
IB asked McCarthy Hockey if there is there something in particular APRA will be watching that insurers should be mindful of?
The APRA member said the regulator will carefully monitor how well entities like insurers are identifying and preparing to mitigate risks among their most material service providers.
“Although CPS 230 is an evolution of what we have had in place under the CPS 231 Outsourcing standard, we’re increasingly finding that when material events hit, they are taking place in a third-party service provider with a direct impact on the financial services entity,” said McCarthy Hockey.
Some industry professionals have raised concerns that bigger insurers have passed the CPS 230 regulatory burden to smaller underwriting agency partners, who could be forced out of business by the compliance obligations.
In a recent interview with IB, FreightInsure CEO Simon Schwarz said one major issue for many underwriting agencies is a lack of resources to manage the new obligations the way big insurers can.
Curium’s CEO Tetiana George, a board member of Insurtech Australia, has repeatedly warned of the pressure CPS 230 could place on smaller agencies.
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“Underwriting agencies are the first obvious group impacted,” she said.
At Steadfast Group’s FY24 results presentation last year, the firm’s leaders said they were expecting the compliance pressures of CPS 230 to create mergers and acquisitions (M&A) opportunities.
“There are some opportunities that may come forward,” said CEO Robert Kelly. “There are underwriting agencies that are being told, not that there’s anything wrong with them, but that they [APRA] don’t want to handle smaller underwriting agencies.”
Kelly said agencies may come under pressure from their capital providers to show how they are complying with this new rule.
Steadfast’s now former COO, Nigel Fitzgerald, agreed. “Then as they [the insurers] look to apply that [CPS 230] to their agencies more specifically, then an agency will identify that the investment required doesn’t meet the operating margins of the business and they will look for an exit,” said Fitzgerald.
Are you implementing CPS 230 this week? Please tell us briefly below about one of the compliance challenges for your business?
