The regulatory push on D&I
Diversity, particularly gender diversity, has been on the agenda for both firms and regulators for a number of years. Over the last two decades, much has been done to promote women into senior positions, however there has been increasing recognition that focusing on one type of diversity is not enough.
The global drive
In a recent statement issued on 16 November 2021, the International Association of Insurance Supervisors addressed the importance of diversity, equity and inclusion and acknowledged that advancing DE&I within insurers' organisations and business models supports sound prudential and consumer outcomes. It recognises that diversity embedded within an organisation, reinforced by a culture of equity and inclusiveness, can reduce the risk of groupthink and therefore improve decision making, and, in turn, positively impact insurer's corporate governance and risk management. Building DE&I into insurers' business models could also facilitate innovation and lead to positive consumer outcomes, prevent potentially discriminatory practices and play a role in achieving broader ESG objectives, such as supporting financial inclusion.
The IAIS will be prioritising work on DE&I that relates to a number of strategic themes identified in its 2020-2024 Strategic Plan, including conduct and culture, financial inclusion, sustainable economic development and technological innovation.
The UK regulators are also heavily focused on this initiative. Recognising that diversity and inclusion is still in its infancy, the Financial Conduct Authority, the Prudential Regulation Authority and the Bank of England issued a joint discussion paper in July stating the importance of a robust policy which clearly set out their minimum expectations. They intend to propose rules and guidance on D&I, and are prepared to use their regulatory powers to take action where firms fail to meet their minimum expectations.
D is for diversity of thought
The focus will be on "diversity of thought", which the UK regulators propose to define as "bringing together a range of different styles of thinking among members of a group. Factors that could lead to diverse thinking could include, but not limited to, different perspectives, abilities, knowledge, attitudes, information styles and demographic characteristics or any combination of these". This definition is intentionally wide and can capture factors from gender and ethnicity, to social-economic, cultural and neuro-diversity. This wide definition is intended not only to reflect the diversity of a firm's consumer base so that firms can better understand their wants and needs, but also the wider financial system.
The regulators expect insurance firms to engage a broad set of qualities and competencies when recruiting members of the board and put policies in place for this purpose. Following publicised incidents of non-financial misconduct, the FCA is considering developing guidance on its fit and proper tests to set the basic standards of conduct and behaviour. In addition, the PRA already expect that dual-regulated firms to have prescribed responsibilities for leading the development of the firm's culture and overseeing the adoption of the firm's culture in the day-to-day management of the firm. Going forward, they are seeking to increase their scrutiny of firms' senior management where they have concerns that the proposed appointment would not address risks arising from lack of diversity and groupthink.
Whilst the regulators are most interested in the diversity of a firm's board and senior managers, diversity at all levels and functions of a firm is also important to encourage diversity of thought across the firm, such as establishing methodologies, developing products, setting claims policies, distribution channels and the approach to customer communications.
I is for an inclusive culture
A diverse workforce may not be enough if individuals do not feel they can speak freely. Therefore, the regulators consider that an inclusive (and equitable) culture, where every person is able to be themselves at work and feel empowered to contribute, provide challenge and raise concerns, is also necessary.
In a 2019 speech, Anna Sweeney (then PRA Director of Insurance Supervision) stressed that whilst recruitment is an element of building a diverse workforce, retention, development and progression are also needed to be embedded in the way firms think about, and manage, talent. She noted that it is not about one off grand gestures, but rather regular consistent practice and building inclusion into internal processes and ways of working. This is echoed in the joint paper where the regulators recognise that care must be taken to avoid a "tick-box exercise" and, instead, continuously develop diverse talent for the future by thinking more about the progression of their employees from their time of entry, to the top of the organisation.
Data collection and reporting
The regulators are considering introducing regular reporting in relation to employee data. They consider that high quality data support evidence-based policymaking, by helping them identify ways in which they can make the most effective policy interventions, and also to help them monitor firms' progress towards their objectives and targets.
In the meantime, as certain events over the last two years have pushed D&I to the top of the agenda, firms should use this momentum and platform for dialogue to understand its own progress and identify potential barriers to D&I in its organisation.