Focus on Risk Management

Transcription

1 Focus on Risk Management NZ Director Forum Presented by John Smeed & Jacob Mamutil 11 June Finity Consulting Pty Limited

2 Content Current requirements in New Zealand APRA s approach What are the lessons for best practice in New Zealand?

3 Regulatory requirements in NZ Risk Management Programme In accordance with IPSA Act section And any guidelines published by RBNZ Section 75 fine of $500,000 for failure to comply 3

4 Risk Management Programme Guideline Link to solvency policy Document describing risk assessment process Capture all Material Risks Including but not limited to: Insurance Risk Credit Risk Liquidity Risk Market Risk Operational Risk Ongoing review process Risk Management Programme Describe roles that accept and mge risk Contingency plans System for addressing noncompliance Prescribes Information flows 4

5 Governing body - responsibilities Responsibilities Solvency Capital Adequacy Liquidity Establish Risk Tolerances and communicate in meaningful way Conflict of interest policy; Related party transactions on arms length terms Approve Reporting requirements Policies Procedures Controls Monitor Risk exposures to ensure consistency with tolerances Legal compliance and compliance with internal policies and procedures 5

6 Risk Management for APRA regulated institutions in Australia

7 APRA setting the context More rigorous governance requirements Consistency across all financial institutions (soon to include Health Insurance as well) APRA s integrated structure and approach have been one of its main strengths - APRA submission to the Financial System Inquiry (March 2014) Build on GFC learnings in restraining excessive risk taking 7 Market discipline not effective Global regulation inadequate Light-touch prudential supervision found wanting Australia punches above its weight internationally in influencing supervisory regulation

8 Focus on risk APRA recently introduced: More risk sensitive capital measures (LAGIC) Internal Capital Adequacy Assessment Process (ICAAP) Formal Risk Appetite More intensive supervision, e.g. meeting regularly with Boards 8 Now with CPS 220 and CPS 510 Chief Risk Officer Separate Board Risk and Board Audit Committees Risk culture Tighter Board oversight of risk framework

9 CPS 220 Consolidates and integrates all risk management components into a refined Risk Management Framework Business Plan Risk Management Strategy (RMS) Risk Management Policies and Procedures Chief Risk Officer Risk Management Function Independent Reviews ICAAP Risk Appetite Statement (RAS) Scenario analysis and stress testing Risk Management Information System (MIS) Annual Risk Management Declaration APRA reporting Building a successful risk culture 9

10 When oversight becomes ensure 10 The Board must ensure that:.. CPS 220 Para 13 Requires more Board involvement in the business operations Has been gradually softened following strong feedback Response to Submissions January 2014 noted ensure was not to be read in isolation to be practically applied. On 8 May 2014 APRA sent a letter to all CEOs that they will insert a definition in the standards that defines ensure to mean all reasonable steps and make all appropriate enquiries to determine, to the best of its knowledge

11 Best Practice in New Zealand what are the key learnings?

12 The Big Picture Risk Management Programme should be holistic integrated with the company s business strategy, risk appetite and capital targets Objectives / Mission Statement Strategy Risk Appetite Business Plan Capital strategy & targets Risk Management Framework and Strategy Governance 12

13 Three lines of defence model Is a useful structured approach 3 rd Line Independent assurance 2 nd line Independent review 1 st line Embedded risk owners 13

14 3 Lines of Defence governance model: APRA s view 14 Source: APRA draft Prudential Practice Guide CPG 220 Risk Management, page 19

15 Clear statement of Risk Appetite Risk Appetite is the degree of risk that the institution is prepared to accept in pursuit of its strategic objectives and business plan. In making decisions, have to ask two questions: Is the risk of the decision acceptable regardless of the amount of reward? If yes, is the risk worth taking for the level of reward? Test: let s take an informal survey on your risk appetite 15

16 Risk Appetite here is a test Activity 1. Online shopping 2. Investing in something that is too good to be true 3. Run along any road at night 4. Cross the road when the light is red (no cars) 5. Go sky-diving 6. Take part in a car rally 7. Go rock climbing/abseiling 8. Go bungee jumping 9. Drive in excess of the speed limit on a quiet road 10. Make decisions independently rather than rely on experts Yes/No 16

17 The Board s role in risk governance Passive BALANCED Active In Australia, APRA believes there is room for material improvement (bordering on intervention!) Strong Board engagement with management lays a solid foundation for risk governance and makes good sense The takeaway for Boards is that a passive approach is not appropriate 17

18 Stronger risk management Benefits that can be achieved Improved resilience to internal and external shocks Improved communication and information flows lead to better decision making Reduced volatility of results through better understanding and treatment of risks Improved risk-return profile 18

19 Some questions for Boards Have you had a holistic look at your risk management programme? Are the risk management accountabilities clear throughout the business and reporting to the Board effective? Are you comfortable that the business understands the firm s risk appetite? What testing of risk culture would give the Board comfort? Do you feel that you have provided the appropriate level of challenge to management? 19

20 Contact John Smeed Tel: Mobile: Jacob Mamutil Tel: Mobile: