APRA cites group life/risk as ‘boiled frog’
The group life/risk sector has been cited by the Australian Prudential Regulation Authority (APRA) as an example of an industry which in recent years was guilty of adopting higher risk business practices without necessarily considering the potential downside.
APRA chairman, Wayne Byers noted the citing of the group risk and mortgage lending standards in an APRA information intended to act as a cautionary note to the financial institutions overseen by the regulator.
Addressing an event in Melbourne, Byers pointed to the current low interest rate environment confronting institutions and said there was a danger of higher risk-taking as institutions felt under pressure to "search for yield".
"This pressure will likely grow the longer low rates persist. To date, we have not seen major shifts in asset portfolios designed to bolster returns by accepting materially greater risk. That doesn't mean that risk-seeking isn't happening at the margins however, and it is at the margins where we need to be most vigilant," he said.
"In my experience, rarely will an organisation consciously decide to ‘roll the dice' and significantly raise its risk profile in order to bolster profits. More likely, it happens over time in small incremental steps, and each individual step will not be seen to materially change the organisation's overall risk profile.
"Indeed, many may be seen as minor, operational decisions that do not even need the scrutiny of senior executives or boards — small tweaks to investment portfolios designed to chase a few extra basis points of yield, changes to product design that improve sales volumes by weakening terms and conditions, or shaving headcounts and investment budgets to save a few pennies of cost," Byers said.
However he said the collective impact of the decisions warranted attention.
"Like the anecdote about the frog in boiling water, there is a danger no one notices the ever-increasing risk profile until it is too late," Byers said.
"I doubt there are many organisations in the Australian financial sector that are not feeling the pressure from a low rate environment. As pressure is applied to find ways to improve returns, it is important that risk considerations remain front of mind. I'm sure we'd all like to avoid becoming boiled frogs!"
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