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…….
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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