Diversity and Inclusion in the Insurance Sector / 1 – Starting from the top

Diversity and inclusion (D&I) in the financial services sector has moved beyond firms’ own recruitment practices. Momentum for change is climbing nationally and globally, both in the regulatory agenda and the commercial one. However, there is still a long way to go.

At the end of 2022, two key D&I publications were issued. The International Association of Insurance Supervisors (IAIS) published a ‘Stocktake on diversity, equity and inclusion in the insurance sector’ which looked at steps taken by supervisors in respect of D&I and the Financial Conduct Authority (FCA) published its findings from a multi-firm review to understand approaches to D&I in financial services.

The IAIS, (which represents the insurance supervisors and regulators of over 200 jurisdictions globally) and the FCA both identified common findings and gaps in firms’ and supervisors’ approach. Referring to the FCA’s findings, Sheldon Mills, FCA Executive Director, Consumers and Competition said: “we are committed as a regulator to taking action on D&I because progress on making financial services, including the insurance industry, representative of the country and communities it serves remains at best uneven, and at worst, stagnant.”  

Bearing in mind the increasing regulatory focus and the commercial benefits of having an effective D&I strategy, firms should act now to consider the effectiveness of their approach.  

Commercial considerations

When presenting their D&I findings, both the IAIS and the FCA stressed the importance of firms being clear about the commercial benefits of having an effective D&I strategy. Firms that fail to understand why they should undertake these efforts, risk considering diversity and inclusion as an optional extra.

Research from McKinsey and Bayes suggests that embedding an effective D&I strategy can result in:

• Better business performance – insurers face many new challenges and new, diverse skillsets are needed for success.
• Risk reduction by creating diversity of thought, resulting in less chance of groupthink and overall better risk management.
• A workforce that represents the society it serves, allows insurers to deliver a better service to customers and to design the right products for customer needs
• Insurers will be able to attract more talent – having more diverse staff may grow D&I within the insurer, which could then naturally embed D&I into the culture and continue to attract talented and diverse staff.
• An inclusive culture in which all staff can speak up allows the benefits of diversity to flourish.
• The psychological advantage of an inclusive culture results in happier employees, which can lead to benefits for employee retention and productivity.
• Firms with diverse boards received significantly fewer misconduct fines

Regulatory intervention

There is clear regulatory determination and increasing momentum to enhance D&I practices in the insurance sector.

Looking back at the timeline of the UK regulatory interventions, in 2020, a FCA Dear CEO letter to General Insurance Firms and a PRA letter to chairs of dual-regulated firms asked recipients to ensure there was appropriate diversity at their firms.

The PRA letter reminded all firms that boards should have the diversity of experience and capacity to provide effective challenge across the full range of the firm’s business. In outline, the PRA requirements which apply to insurers, require firms to engage a broad set of qualities and competencies when recruiting board members and to put a policy in place for this purpose. They must also explain on their website how they comply with these requirements.

In July 2020, the FCA’s incoming CEO, Nikhil Rathi, promised in a statement to the Treasury Committee that if the FCA does not see progress in financial firms delivering diversity, supervisory action may be taken and senior appointments may be blocked.

In 2021, the Bank of England, PRA and FCA published jointly the Discussion Paper DP21/2, ‘Diversity and inclusion in the financial sector – working together to drive change’ , setting out their intention to improve D&I practices. The UK regulators’ set out their goal: “to see increased diversity and inclusion in financial services translate into safer and sounder firms with better internal governance and risk management, a more innovative industry, and financial products and services that meet the diverse needs of consumers.”

In 2022, the FCA has continued to stress the importance of increased D&I. The Business Plan for 2022-23 and the wider strategy for 2022 to 2025, set out FCA’s expectations. The Business Plan confirmed that the authorisation of firms and individuals will take D&I into account. In its strategy, the FCA remarked that it had “significant work to do to make … financial services more diverse and inclusive” and that it “will continue to drive change across industry, tracking progress through firm data.”

PS 22/3, also issued in April, set out new Listing Rules requiring relevant firms to report on a ‘comply or explain’ basis against specified targets of the gender and ethnicity compositions of boards and executive management.

The FCA and PRA have not yet consulted on implementing further D&I requirements specifically for the insurance sector, however, they have confirmed that they are working together to finalise their position before a consultation is published in 2023.

Finally, in December, the FCA published its findings from a multi-firm review to understand approaches to D&I in financial services.

Following the UK regulators’ lead, Lloyd’s have taken a more directive and prescriptive approach to diversity and inclusion. Its culture principle states: ‘’Managing agents should be inclusive, creating a diverse high-performance culture’’. Lloyd’s prescribe that to support this, managing agents should:

1. Demonstrate leadership focus on fostering an inclusive, high-performance culture
2. Ensure behaviour expectations are clear and there is zero tolerance for inappropriate behaviour
3. Encourage speaking up, ensuring there are appropriate tools for employees to do so, and the tone is set from the top
4. Ensure diverse representation within their workforce and their leadership population. Be inclusive in how they hire and retain talent and ensure they reflect society and their customers
5. Understand their employee population, collect appropriate data and take action to create an inclusive employee experience.

Understanding D&I

It is essential that firms understand what is meant by D&I. ‘Diversity’ reflects the differences between people within an organisation or wider society. This includes different perspectives, abilities, knowledge, attitudes, skills, experience and demographic characteristics.

The FCA, PRA and Bank of England’s joint Discussion Paper explained that with respect to diversity, the UK regulators focus on ‘diversity of thought’ or ‘cognitive diversity’ which is “bringing together a range of different styles of thinking among members of a group.”

Factors that could lead to diverse thinking could include, but are not limited, to different perspectives, abilities, knowledge, attitudes, information styles, and demographic characteristics, or any combination of these. Demographic characteristics include, but are not limited to, characteristics such as age, disability, ethnicity, gender, national origin, religion, sexual orientation, as well as cultural, educational and/or socio-economic background. It is also important to recognise that individuals can have a combination of different diversity factors.

Inclusion is when all people within an organisation, regardless of their differences, feel a sense of belonging which enable them to fully participate in and contribute the organisation. An inclusive culture is necessary to enable the benefits of diversity of thought to flourish.

The IAIS consider that diversity should be reinforced not only by a culture of inclusion but also ‘equity’. It defines equity as “seeking to achieve fairness and equal outcomes for all through allocating resources and opportunities in a way that recognises the different circumstances and needs of different groups of people, particularly where there is evidence of disadvantage among certain groups.”

This article was first published on Thomson Reuters Regulatory Intelligence.