Risk appetite - EY Financial Services Thought Gallery

34 Pages·2014·1.13 MB·English

Risk appetite
Getting in shape – building and sustaining your risk
appetite
27 February 2014
Getting in shape – building and sustaining your risk
appetite
James Maher Phil Vermeulen
Insurance and Actuarial Services Partner European Risk and Actuarial
Leader FSO Ireland Services
Direct tel: [phone]
Direct tel: [phone]
Mobile: [phone]
Email: [email protected]
Email: [email protected]
Risk appetite
Agenda
egulatory update
I. R
II. Background and context
III. Embedding risk appetite
IV. Hard to measure risks
V. Risk culture
VI. Summary
VII. Q&A
Risk appetite
Regulatory Update
Regulatory update
Source Scope Measurement Other
and capital
FSB Designationby IAIS As per Comframe Resolutionplan; recovery
[BCR]/HLA /ICS plan; systemic risk
management plan;
GSII liquidity risk management
plan
IAIS $50bn assets TBD - Field testing Legal and management
$10bn GWP being initiated structures; governance;
3 territories enterprise risk
[BCR]/ICS management; public
disclosure and group
Comframe
reporting
EIOPA / European Domicile SII Balance Sheet ORSA; public disclosure
EU GWP > EUR 5mn MCR/SCR via SFCR
Gross TP > EUR
Local/
25mn
Solvency II
Risk appetite
Background and context
Context - Past, Present and Future
Financial Crisis:
I. Correlation to maturity of RAF
II. Sovereign Exposures
Past
III. Guarantees
IV. Failures in insurance
need for
Post Crisis Insurance :
I. Low Interest Rates effective RAF
Present
II. Conduct Risks
III. Operational Risks
IV. Control failures
Current and Emerging Risks :
Future I. Strategic Risks
II. Cyber Risk
III. Regulatory Risks
IV. Program Risks
Risk appetite
Agents and agencies driving the agenda
Management
► Use of multiple VaRmeasures and other risk
limits for different risk categories leading to:
FSB ► Difficulty in aggregating risk appetite across the Shareholders
organisation
► FSB Principles aim to ► Limited understanding of the aggregate risk ► Shareholder seeking stability
enhance the supervision of profile of earnings with ‘no surprises’
financial institutions ► Limited capability to compare risks across BUs ► Lack of transparency of the
► Key focus is an effective risk and risk types risk profiles of insurance
appetite statement that companies depress market
reinforces strong risk culture Internal challenges capitalisation
R
which is critical to sound e ► Stakeholder management
s
financial management g e improved by implementing an
u r
► The Principles set out the key la u effective risk appetite
s
elements in achieving this t framework across the
o s
r Risk Appetite e organisation and embedding
y r
Framework p in firm’s risk culture
p
r t
e e
PRA s k
s r
a
u Rating Agencies
M
r
e
► Increased scrutiny from PRA s Internal challenges
into insurers’ risk appetite ► Rating agencies are placing
frameworks based on the Internal Audit increasing importance on their
experience and best practices assessment of ERM as part of
observed in the banking the rating assessment
IA guidance recommends:
industry process
► Increased focus on a strong ► Internal Audit should assess whether the risk ► Risk culture and risk appetite
appetite has been established through the
risk culture key parts of this assessment
active involvement of the board.
► Internal Audit should include within scope the
risk and control culture of the organisation.
Page 7 Effective risk appetite framework
Areas requiring a significant effort to achieve an effective
risk appetite framework
(from EY Risk Appetite Survey)
Alignment with FSB attributes for risk appetite frameworks
FSB Principles Ineffective/partially effective attributes
Framework communicated across the
organisation
Effective risk
Embedded and understood across the
appetite
organisation
framework
Key areas of challenge
Facilitate embedding risk appetite in risk
culture
1. Qualitative aspects of risk appetite
(cid:127) Communicating risk appetite framework
Quantitative statements with due
across the organisation and embedding
consideration to reputational & conduct
Effective risk
risk risk appetite within risk culture
appetite
statement Firm wide statement consistent with legal
entities’ strategy and risk limits 2. Quantitative aspects of risk appetite
(cid:127) Ensuring risk appetite statement
Top three challenges to risk appetite implementation consistent with strategy and cascading it
down to business units / legal entities and
Effectively cascading the risk appetite
across risk types
statement throughout the organisation
Key challenges
Using the risk appetite framework as a
for risk appetite
dynamic tool for managing risk
implementation
Expressing risk appetite for different risk
types
Page 8 Effective risk appetite framework
EY 2013 survey findings – what works !
Roles and
“Getting a risk appetite “There’s no silver bullet……….at responsibility
framework in place is a key the end of the day its really how
element for building a strong people behave.”
risk culture…”
Linkage to strategy
and planning
“The best driver is
consequences for people who
Embedding RA into
“While the board should have s
fail to deliver on their
a clear risk appetite operational e
accountability”
m
statement, a junior processes
e
underwriter probably just
h
needs to know his limits…”
t
Strengthening t
n
communication
e
“We have our risk appetite, our r
r
strategic planning and financial u
c
“What we have done………is planning fully integrated….”
Measurement and e
have much better clarity around R
reporting
the organisation in terms of
roles and responsibilities…”
“We have a framework which is well Behaviours and
embedded with the plan but have attitudes
identified improvement potential in
the risk culture awareness of
“The value was in the journey not
organisation so everybody in the
the outcome.”
company gets it.” Accountability
Risk appetite