Diversity and Inclusion in the Insurance Sector / 2 – D&I in practice

As we outlined in our previous article, the findings from the FCA’s multi-firm review on Diversity and Inclusion in the Insurance Sector to understand approaches to D&I in financial services, provide a useful resource to help firms consider and review the adequacy of their D&I strategies. Some key findings and recommendations are summarised below.

In implementing and maintaining an effective D&I strategy it is essential for a firm to consider both:

• internal representation within the firm itself; and
• sufficient knowledge and understanding to enable the firm to serve its diverse clients well

Despite this the FCA found that none of the retail firms in the review had undertaken substantial work on the diverse needs of their consumer base.

Internal representation within the firm itself

The Association of British Insurer’s (ABI’s) Talent & Diversity research in 2021 highlighted that some progress is being made across the insurance industry in gender balance at board level, however, it also found that only 24% of executives in the insurance industry were women, despite 55% of new industry joiners being women. Similarly, only 2% of insurance executives were minority ethnic, despite 10% of new industry joiners being minority ethnic.

Research undertaken in 2020 and published by NEDonBoard identified similar findings. The research looked at the profile of independent non-executive directors (INEDs) across two sub-sectors of the UK insurance industry – financial mutuals and Lloyd’s of London insurance market Managing Agents.

103 new INEDs had been appointed over the five years to Summer 2020. Of the 103 INEDs appointed in the five year period in the random sample:

• 99% (102) white
• 77% (79) men
• 23% (24) women
• 1% (1) Asian woman
• Zero black or Asian men had been appointed
• All were middle-aged (45+) or older at the time of appointment, with the exception of one woman

Like the ABI research, this shows that while the gender picture is beginning to look more encouraging, the ethnicity mix needs significant progress.

To illustrate the direction of regulation, if the new requirements for listed firms were applied to the 34 (unlisted) firms in the sample, around 17 more women and 33 more ethnically diverse appointments, with correspondingly fewer ‘white men; would need to be made. The data also raises the question of whether the female appointments were made from the same demographic or social groups as existing board members, and how neurodiversity and disability play into the picture.

Strategy Effectiveness

The FCA’s survey found that firms’ D&I strategies are not consistently based on a clear diagnosis of their specific circumstances and challenges.

Good data is critical in managing D&I. It allows firms to identify where they are doing well, and areas where intervention might be needed. It also allows firms to measure and be accountable for progress being made.

The FCA’s review found that firms are mainly focusing their data collection efforts on the gender and ethnicity of their staff. The ABI and NEDonBoard statistics referred to above support this finding.  

Firms can learn and progress if they broaden the data they collect. They need to consider all demographic characteristics, not just gender representation and ethnicity, (for example, religion and belief; sexual orientation; disability; socio-economic background; and neurodiversity). Furthermore, ethnicity representation should extend beyond a simple white/ethnic minority split to show outcomes for different ethnic minority groups. Firms should also consider if there are compounded issues for people belonging to more than one minority group.

Strategies should have clearly linked diagnosis, action, and measurement. The FCA identified that firms are not systematically tracking the effectiveness of their D&I measures and initiatives. An effective D&I strategy should be informed by both a diagnostic process and better tracking of initiatives.

Recruitment

The requirement for relevant experience is key for any appointment, but too narrow an interpretation of that requirement can lead to a lack of diversity. Firms should focus on strategically important competencies such as digital acumen or entrepreneurship as part of the boardroom mix. This is likely to increase overall diversity, including in ethnicity, social or educational background and age.

Firms should also assess whether those involved in the recruitment process are making sufficient effort to participate in diverse networking events. There is evidence that  anonymised CVs reduce race, gender, and age bias throughout the interview process.

Succession Planning

The FCA has identified that diverse representation falls markedly between junior and middle-management levels. Most firms are focusing their D&I strategy on improving representation at senior leadership level (because of external targets and expectations). This approach is not sustainable and risks creating a culture of firms poaching senior talent, instead of developing it. Firms should be able to build and develop a sustainable diverse talent pipeline, throughout the organisation.

Culture

The FCA found that very few firms have understood D&I as a fundamental culture issue. Firms are likely to struggle to make sustainable, meaningful change without greater attention to culture, including a long-term plan to deliver change, backed by senior level commitment.

Firms should recognise that fundamental issues, such as psychological safety and welcoming different perspectives, are critical to an inclusive culture.

Board level and governance work

Firms should consider how well the current board skills and capabilities match the needs of the business strategy. The current director tenure profile should match sufficiently well to the communities/consumers/stakeholders it serves.

As with all change, tone and example from the top will determine the extent and pace across the whole firm. Valuable insights can be gleaned into progress in the diversity of board appointments in aggregate by looking at available information from a variety of public sources along dimensions of gender, broad ethnic group, age and date of appointment. This also serves to test a suggestion that when search firms and nominations committees consider if a candidate would be good ‘fit’ with the existing board, there is an inherent bias towards ‘someone like us’.

Candidates may be being disregarded because they lack the skills and experience required for regulatory approval. However, not all NED roles require regulatory approval under SM&CR, and skills gaps can be filled through training.

Firms can consider establishing advisory boards to tap into strategically important knowledge and experience such as the needs of culturally diverse customer communities. This may also provide an opportunity to help with upcoming Customer Duty responsibilities to ensure good outcomes for all types of customers.

Diversity considerations into pricing practices

In March 2022, Citizen Advice have called for an FCA investigation after its research found evidence of an ‘ethnicity penalty’ in the insurance market.

The FCA may launch an investigation, but its rules here have been consistent, and it has a statutory requirement under the Public Sector Equality Duty to look for ways to eliminate discrimination and advance equality of opportunity. In addition, the new Consumer Duty is providing a new framework for the FCA to intervene.

The FCA has been clear about firm’s obligations under the Equality Act. In 2018, following the review of pricing practices that eventually led to the dual pricing ban, CEO Andrew Bailey identified “the risk of discriminating against consumers through using rating factors in pricing based (directly or indirectly) on data (including third party data) relating to or derived from protected characteristics” as an issue that could cause significant harm and poor outcome for consumers.

Its 2021 guidance on the fair treatment of vulnerable customers reminded firms that a likely breach of the Equality Act “will also be a breach of the FCA’s rules”. Last year the FCA and Equality and Human Rights Commission signed a commitment to share information and take action to help protect people in financial service markets.

The New Consumer Duty also enforce the point, stating: “Where distinct groups of customers experience different outcomes from a firm’s products or services, we would expect firms to investigate the causes of this. This is particularly important where groups sharing protected characteristics under the Equality Act 2010 may be disadvantaged.

Firms would need to satisfy themselves, and be able to evidence to us, that these different outcomes are compatible with the firm fully meeting the standards required by the Consumer Duty for all its customers.

This article was first published on Thomson Reuters Regulatory Intelligence.