Risk Appetite – What the CEO and Board should be doing€¦ · Source: Risk appetite. The...
Transcript of Risk Appetite – What the CEO and Board should be doing€¦ · Source: Risk appetite. The...
Risk Appetite – What the CEO and Board should be doing
Ian LaughlinAPRA Member
NETWORKING
25 July 2011
Today
• Recent History • What is it?• Whose is it? • Articulation, Translation, Co-ordination
etc• Consistency with Plans• APRA’s Requirements • Assessment of RA Statements• How Actuaries Can Help
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Bad luck? Appetite Unclear?
Appetite > Capacity? Risk > Appetite?
• Westpoint, ACR, MFS, City Pacific …• Opes Prime• Tricom• Centro• Allco • Babcock and Brown• NAB (CDOs), ANZ (Opes), RAMS, • AMI (NZ)
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• Bear Stearns, Lehman Bros … • Credit Agricole• Northern Rock, RBS, …• Irish Banks• Icelandic Banks• AIG • MBIA • UBS• Fannie Mae, Freddie Mac
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Useful references
• Risk appetite - The strategic balancing act – Ernst & Young 2010• Risk appetite – How hungry are you? – PWC• What’s your risk appetite – Oliver Wyman 2008• Understanding and articulating risk appetite – KPMG 2008• Risk Appetite - Society of Actuaries Webinar 2011 – Kent Griffin• Risk Appetite - Bennet and Cusick 2007• Implementing Robust Risk Appetite Frameworks to Strengthen
Financial Institutions – Institute of International Finance June 2011• Strengthening the board-management dialogue on risk and
strategy – Tapestry Networks 2010
Source: Risk appetite. The strategic balancing act. Ernst & Young 2010 5
Risk capacity: the amount and type of risk an organization is able to support in pursuit of its business objectives.
Risk appetite: the amount and type of risk an organization is willing to accept in pursuit of its business objectives.
Risk tolerance: the specific maximum risk that an organization is willing to take regarding each relevant risk.
Risk target: the optimal level of risk that an organization wants to take in pursuit of a specific business goal.
What is it?
Whose appetite is it anyway?
• Shareholders focus is usually here
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Whose appetite is it anyway?
• Shareholders focus is usually here• Customers but needed here too
e.g. – Lifeco Par Policy-holders– Debenture-holders– Depositors
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Articulation: Risk Appetite
Qualitative
Quantitative
“conservative”; “aggressively pursue opportunities ..”“low appetite for risk except if directly related to core skills”“we have no appetite for systematicoperational risk”“not tolerate damage to reputation”
“less than a 10% chance of a loss each year”“less than x% chance of a breach of PCR in next 2 years”“maintain S&P rating of AA”“no more than X% decline in embedded value with 95% prob.”“a negative return once in about every 7 years”
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“considerable appetite for new ventures”“we have a war chest for …”“guaranteed”“backed by first mortgages”“low risk”“speculative”“aggressive”
Articulation: Risk Tolerance
“return on economic capital of no less than x% over 3 years”“system downtime no more than …”“no more than xx complaints each year”;“expenses not to exceed budget by more than xx%”“fraud less than yy% of total claims”“counterparty credit rating no less than B”“we will not tolerate fraud or illegal activity by staff”“we have no tolerance for discrimination”“unit pricing rectification no more than $Y”“individual claim exposure of no more than $X”“credit losses of no more than $Z”“VAR of no more than …”
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Translation
CompanyAppetite(Quant/Qual)
Tolerance(quant)
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Bus. UnitRisk by Type
Coordination
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Appetite(Quant/Qual)
Tolerance(quant)
Company
Bus. UnitRisk by Type
Monitoring & Corrective Action
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Company
Bus. UnitRisk by Type
Tolerance(quant)
Appetite(Quant/Qual)
All this is difficult to do well
• Articulation• Translation and quantification• Co-ordination• Monitoring & Corrective Action
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APRA’s Requirements (LPS/GPS 220)
• Risk Management Framework
• Risk Management Strategy• Risk Appetite
Board Responsibility
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RA and Capital Management
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Assessment of Risk Appetite Statements
Draft Guidelines for APRA Supervisors
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RA GUIDE FOR SUPERVISORS - GOVERNANCE
• Board engaged in the development of the RA
• RA considers the interests & expectations of all relevant stakeholders.
• RA is periodically reviewed in the context of the economic conditions and competitive environment.
• There is a feedback loop to Board
• Board satisfied that risk tolerances & limits are understood & applied as intended.
• The RA seems reasonable, makes sense.
• Within group structures a) a group RAS; and b) a RAS for each entity which is consistent with the group RAS.
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RA GUIDE FOR SUPERVISORS - RISK MANAGEMENT
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• The RA considers the material types of risks.
• The RA statement is core to the risk management framework and sets clear boundaries and expectations.
• The RA is supported by tolerances and limits, which are embedded in the business.
• The RA is considered when assessing the adequacy of controls in mitigating risks.
RA GUIDE FOR SUPERVISORS - IMPLEMENTATION
• The entity’s strategic objectives and business plans are consistent with the RA.
• The entity’s capital management plan is consistent with the RA; and capital levels and targets are monitored and reported against the RA.
• The risks necessary to produce required returns on capital are within the RA.
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RA GUIDE FOR SUPERVISORS - COMMUNICATION
• The board regularly receives reporting on the entity’s level of risk relative to its RA.
• Scenario analysis and stress testing are performed against the RA and reported to the board.
• Communication of the entity’s RA and/or its derived tolerances and limits to each part of the entity’s operations.
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Discussion
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Actuaries can help CEOs and Boards
• Articulation• Translation/quant• Co-ordination• Monitoring & Corrective
Action
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Actuaries can help CEOs and Boards
• Articulation• Translation/quant• Co-ordination• Monitoring & Corrective
Action
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• Remuneration and RA• ICAAP and RA• Stress testing and RA
Summary
• Risk Appetite is foundation of sound risk management
• It is difficult, but critical, to:– Clearly articulate RA– Translate RA into risk tolerances – Co-ordinate risk positions by type and BU– Monitor risk and take corrective action
• APRA is increasing its intensity of RA supervision
• Actuaries can help CEOs and Boards
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Discussion
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