2012 RISK APPETITE SURVEY ACTUARIES INSTITUTE

Transcription

1 2012 RISK APPETITE SURVEY ACTUARIES INSTITUTE 14 NOVEMBER 2012 Jacqueline Reid Chair of Risk Appetite Working Party

2 Background to survey Actuaries Institute Risk Appetite working party Members of the working party: Jacqueline Reid (Marsh) Josh Corrigan (Milliman) Matt Hodson (EY) Bruce Lambert (Suncorp) Kerrie Noonan (MLC) Bartosz Piwcewicz (Quantium) Kaise Stephan (Deloitte) Angela Tatarow (NAB) Christopher Vo (Marsh) Workstreams: Definitions Current practice Best practice Implementation Library/Reference materials Actuarial role This presentation is about the survey conducted as part of the current practice workstream Participation in survey by invitation, not a random sample Over 40 questions, presentation of highlights only. Initial responses. 1

3 Survey participants Strong interest in risk appetite: topic & peer group comparisons WHICH COMPANIES WERE INVITED TO PARTICIPATE? The 2012 Actuaries Institute Risk Appetite survey was sent to 26 large Australian companies across banking, insurance (life, general, health and reinsurance), financial services, wealth management and corporates 19 companies responded within 2 weeks of being sent the survey Conclusion: Strong interest in this area & peer group comparison WHICH COMPANIES RESPONDED? Industry: 13 insurers/reinsurers (68%), 6 banking/bancassurance & other financial services (32%) Market cap: 12 companies responded. Not all companies are listed, but some global companies responded n/a 8 out of the 12 companies who provided market cap data would fall into the ASX 100 category # companies Market Cap <1bn 1-5bn 5-10bn 10-15bn >15bn n/a 2

4 Survey participants Big Australian companies best of current practice? WHICH COMPANIES RESPONDED? (continued) Balance sheet size - Balance sheet size: 19 responses - 8 had assets > $10bn - Comparisons distorted by industry (banks/insurers) - Employees: 18 responses # companies <$1bn $1-5bn $5-10bn >$10bn 6 Employees Conclusion: Largest banks, insurers & financial services companies in Australia responded to the survey # companies Hypothesis: Responses should represent best practice in Australia 1 0 < >10000 "large" 3

5 Do you have a risk appetite statement? Yes. Australia s largest compares well globally. RESULTS: 17 out of 19 respondents have a stand-alone formal enterprise level document which defines the organisation s risk appetite The remaining two respondents have policies & processes or limits & thresholds 8 have both When asked how long the company had had an effective RAS, 9 out of 17 respondents said over 2 years, with the remaining 8 respondents equally split between less than 1 year and between 1-2 years OBSERVATION: In early 2011 APRA found in some cases there is no clear statement of Risk Appetite, or no obvious understanding of what it actually is in concept for some insurers GLOBAL COMPARISON: 2010 global survey of insurers by Towers Perrin 59% of respondents had a documented risk appetite statement in place 2006 survey by Deloitte - Roughly two thirds of executives at institutions with an ERM program said they created a formal, enterprise-level statement of their risk appetite. Survey primarily of commercial and retail banks and diversified financial institutions 4

6 Who dunnit? CRO and Board 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Board Executive committee Board risk committee Mgt risk committee CEO Led development Provided final authorisation CFO CRO Chief actuary/aa Group/head office Risk mgt team Provided input/review Not involved Bus Mostly the CRO led its development and Board provided final authorisation Chief Actuary and Appointed Actuary involved, often leading development (2 companies where not involved responded not applicable ) Business units only provided input or review in 53% of cases 5

7 Contents of the RAS A cheeky question using APRA s draft requirements for super funds A question about the contents of the RAS Which of the following does your RAS contain: Degree of risk co is willing to accept Max level of risk/measurable risk limit Process for setting risk tolerances Timing & process for review It was a cheeky question based on APRA s draft prudential standards for super funds (released April 2012) 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Degree of risk co is w illing to accept Contents of RAS Max level of risk/measurable risk limit Process for setting risk tolerances Review - timing & process No Yes Almost ¾ of respondents did not meet APRA s requirements for super funds Contents requirements met All 4 26% 3 26% 2 16% Only 1 32% 6

8 Drivers of risk appetite Shareholder input and perspectives relatively more important in Australia HIGH: Strategy & business plans (14/19, but 3 ranked as least important) Capital capacity (11/19) MID LEVEL: Shareholder input (9/19) Budget targets (6/19) LOW LEVEL: Liquidity Culture Stress test results External market Current risk profile Capital capacity Budget targets Liquidity Culture Shareholder input Stress test results External market Current risk profile Strategy/bness plans Key drivers are consistent with IIF survey results Difference are in mid level drivers: - shareholder input and perspectives appears a more important driver in Australia (top 3 by 9 out of 19 firms) - liquidity and other market constraints appears a more important driver in IIF survey 7

9 Reporting against the RAS Who gets it and how often? Who Respondents # % Bness units 1 5% Risk mgt team 11 58% Both 6 32% Other 1 5% 90% of respondents said the risk management team is either wholly or partly responsible for reporting against the risk appetite Board/Board subcommittee CEO/Executive committee Mgt risk committee CRO or equivalent Monthly Quarterly Semi-Annual Not reported Almost 70% of Boards receiving quarterly reports and over 40% of CROs receiving monthly reports Some companies only have reporting to Board level, fewer only have reporting to CRO level (over 30% don t have reporting to CRO level) Respondents were also asked to indicate the desired level of reporting. Some respondents indicated they would like an increase in frequency of reporting, or a change from no reporting to some reporting 8

10 Reporting against the RAS Triggers and consequences Thresholds to prompt action Respondents # % All risks 2 11% Some risks 13 68% No 3 16% Not answer 1 5% Only 11% have thresholds on all risks to prompt action Almost 80% have thresholds on at least some risks 16% don t have them on any Consequences to breaching RAS Respondents # % Report to board or risk committee 9 47% Remuneration 5 26% Yes, not specific 3 16% Review RAS 1 5% Regulatory 1 5% Not answer 6 32% Respondents were asked if there were consequences of breaching the RAS, and what they were (a free text response) 26% included remuneration in their answer, so a clear link 1 said the regulator would determine the consequence 1 said they would review the RAS following a breach 9

11 Implementation Consistent & Communicated throughout business Demonstrated consistency Respondents # % Yes - completely 2 11% Yes - partially 12 63% No 4 21% Not answer 1 5% Establish culture Consistency across business Biggest implementation challenge Improving systems Translating to business level Integrating into strategy Concept clarity Balance risk/reward Communication of RA Respondents # % Board/senior mgt only 10 53% All employees 8 42% Publicly available 1 5% Risk appetite training Respondents # % Board 17 89% Executive 17 89% Risk managers 14 74% Directly impacted staff 6 32% All staff 2 11% No answer 1 5% Operational buy-in Over 20% of respondents have not demonstrated the consistency between the bottom up risk limits and the top down risk appetite statement 8 out of 17 respondents said that "Translating high level objectives into meaningful business level guidelines was the biggest implementation challenge Only half of companies communicate the risk appetite to all employees with the other half confining it to board/senior management level In another question, less than half of respondents had tolerances and limits supporting the risk appetite which were embedded within the business Almost all boards and executives have received training around the risk appetite, the exception being the company that only provided training to directly impacted staff (and the company that didn t answer the question) 10

12 Biggest benefit of having a risk appetite framework Something to talk about 1. Strategic risk conversations at Board and senior management level 2. Foster culture throughout organisation 3. Integration of the risk appetite into strategic/business plans 4. More effective risk/reward decision making across the organisation 5. Consistent language of risk across all levels 6. Risk management have a greater role in working with business units to set strategy and plans 7. Improved enterprise risk management throughout the organisation 8. Being able to report and explain the organisation's risk profile against agreed benchmarks/risk appetite metrics 9. Establishing consensus on how much risk the organisation can afford 10. Improved Board risk oversight and governance 11. Satisfying APRA's requirements 12.Avoiding a Pillar II adjustment (or other regulatory or market penalties) The biggest benefit from having a risk appetite framework was that it fostered strategic risk conversations at Board level. Improved board oversight was also a big benefit. 11 out of 17 respondents ranked these in the top 3. Other benefits included fostering culture and more effective decision making. The least important benefits were satisfying APRA and avoiding Pillar II adjustments, although one respondent company ranked these two in their top Strategic risk conversations at Boa.. Integration of RA into strategy Foster culture throughout organisation Consistent language of risk More effective decision making Improved ERM throughout co Risk management have a greater ro.. Ability to report/explain co's risk pro... Establish consensus on how much... Improve Board oversight Satisfy APRA Avoid Pillar II adjustment IIF survey also ranked allowing the Board and senior management to have strategic risk conversations as the biggest benefit 11

13 Importance of the RAS to the organisation Not reducing generally increasing Compared to 2 years ago, 100% of respondents thought the RAS was either more important or as important to the organisation Compared to 2 yrs ago RAS is more important 84% as important 16% less important 0% Not just something to talk about, also clearly used in decision making particularly setting boundaries for business risk-taking. 89% of respondents have risk appetite linked to performance and 63% have it linked to remuneration 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Survey results IIF survey Linked to risk appetite Respondents # % Remuneration 7 37% Performance assessment 12 63% Both 5 26% Neither 5 26% Strategy Risk financing/insuranc e Set boundaries for business risktaking Project management/deliv ery Investment and M&A decisions Contract placement decisions 12

14 Conclusion Risk appetite increasingly important Conversation about risk at Board level Used in decision making Linked to remuneration and performance Communication throughout organisation Australia seems to compare well with international peers Thank you to participants in the survey and working party 13

15 References Global surveys IIF survey, June 2011: Towers Perrin survey, December 2010: Survey-Rpt-NA pdf Deloitte survey, 2007: BosniaHerzegovina/Local%20Assets/Documents/ba_fsi_global_risk_mgmt _survey2007.pdf Marsh/AIRMIC survey, 2009: 14