Presentation - Institute of Actuaries of Australia
A collection of risk management thoughts Dark risks vs. ERM upside Simone Leas Greg Martin © Simone Leas, ClearView Wealth Limited © Greg Martin, ClearView Wealth Limited This presentation has been prepared for the Actuaries Institute 2015 Actuaries Summit. The Institute Council wishes it to be understood that opinions put forward herein are not necessarily those of the Institute and the Council is not responsible for those opinions. Why this paper……. T y p hi rs e d a e L What How Why pi c al • The “Why” for ERM itself is clear a p p r o a c • But in what we actually do; approaches: ➢ A lot of “what” ➢ Some “How” ➢ Not much “Why” h • So what? ➢ ➢ ➢ ➢ Communication Appetites Understanding Confusing Capital and ERM http://www.ted.com/talks/simon_sinek_how_great_leaders_inspire_action?language=en Risk Classification What How Why Name or classify risks Using the source of the risk Simple? Historic? Risk Classification What How Why Name or classify risks Split the universe of risks Understand how groups of risks behave Risk Classification Value Add Tractable “Chicken & Egg” lu a V Universe of Risks dd A lue a nV o N d A e d Non Value Add Remove on cost benefit basis “Travelling back in time paradox” Risk Classification Internal Entity Specific Systemic Impact similar way From outside lu a V Universe of Risks dd A lue a nV Systemic o N d A e d Entity Specific Isolation From inside/outside External Risk Classification Entity Specific Internal lu a V Strategic Alpha Operationa l Beta Resilience dd A lue a nV Systemic o N Imposition d A e External d Value Add Beta Systemic Example: systemic insurance, asset, liquidity and asset-liability mismatch risks • Well established models & tools to manage risks • Risks come with a market price Value Add Alpha External Entity Specific Example: individual claim/asset performance or liquidity risks within the insurance and asset risks • Well established models & tools to manage risks • Manage risks with scale, diversification, reinsurance etc Value Add Internal Strategic Entity Specific Examples: Product, innovation, human capital, org governance • Little ability to hedge or off load risk • Few measurement tools • Often bespoke risk management Non Value Add Internal Entity Specific Operational • • Internal business risks Measurement on historic data problematic Non Value Add Entity Specific Resilience Imposition • • Examples: Fraud, Compliance, Errors, Omissions External Examples: Cyber attacks; local terrorism Measurement on historic data problematic Few hedging of risk tools Non Value Add Examples: Tax changes, regulation changes Systemic • Area of least ability to model, measure, manage and price • No insurance or risk transfer mitigations • Any realistic solution is bespoke Risk Classification So What? Practical uses: • Discussing and distilling Board Risk Appetite • Understanding and explaining to others • Constructing overall RMF • Using the risk traits to consider effective mix of processes, culture, controls, “safety nets” and mitigants Risk Classification Internal Entity Specific lu a V d A e Universe of Risks dd A lue a nV Systemic o N External d Measuring Op Risk Stochastic Models What Measure op risk How Stochastic Models Qualitative Model Why Calculate capital charge? Manage op risks? Qualitative Approaches Impact Likelihood Notable Severe Catastophe Medium Medium High V High V High Likely Low Medium High High V High Possibly Low Low Medium High High Unlikely V Low Low Low Medium Medium Remote V Low V Low Low Low Medium Frequent Concerning Damaging Measuring Op Risk Observations What Measure op risk Link between stochastic and qualitative approaches How Maximise data from within the business Limits of qualitative approach Why Manage day to day op risks Risk Management Capital Measuring Op Risk Finding Data Points Risk Assessment Financial Loss $0-$-.1m Regulation People How often? $0.1m - $0.5m $0.5m - $3m $3m - $8m $8m - $15m >$15m No breach Minor breach Regulator Reprimand Private Directions Fine, Public Orders Loss of Licence Increased staff turnover High staff turnover Significant loss of talent Substantial loss of talent Significant Exec All Senior Exec's staff loss leave Measuring Op Risk Difference between capital and risk management RMF & risk culture adjustment RMF & risk culture adjustment Extra dark risks allowance Dark risks allowance Estimate uncertainty allowance Capital Charge Difference Estimate uncertainty allowance Correlation allowance Statistical stochastic model result Top Down Stochastic Model Approach Sum of individual risk assessment distributions Bottom Up Qualitative Model Approach Day to day Risk Management Risk Communication What Produce risk report How Risk report with all the risk exposures. Why Report to the Board on the current risks of the business? Risk Communication Results: Risk Communication What Produce risk report How Add a One pager Visual to the risk report Why Help the Board identify the overall risk status, outlook and trends Risk Communication
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