Understanding and Communicating the Uncertainty and Ambiguity of Risk

Transcription

1

2 Understanding and Communicating the Uncertainty and Ambiguity of Risk Risk Management Practice Committee (Past and Present) Simone Leas, Clearview Kent Griffin, TAL Anton Kapel, AMP Joshua Corrigan, Milliman (chair)

3 Getting to grips with uncertainty Dynamics Interactions Predict Explain Knowledge & Action Conditional Factors Probability Understand Model Communicate Understanding is the foundation of analysis and communication 3

4 Evolution of Homo Actuarius Guessing Data driven Statistics driven Data and hypothesis Adaptive thinking Image by Joshua Maggid

5 The Monty Hall Problem

6 A Bayesian and a Frequentist are out walking in a storm...

7 Frequentist vs Bayesian Frequentist Objective / physical controlled random experiments (e.g. radioactivity) Stable and identical distributions law of large numbers applies Unconditional x% just care about outcomes Controlled repeatable random experiments (e.g. dice) data derived long run frequency is key No information prior to model specification Bayesian Subjective / evidential degrees of belief supported by evidence (e.g. medical diagnosis) Dynamic and regime dependent distributions with little data works before the law of large numbers applies Conditional x% depending on outcomes dependent upon prior information of underlying factors No controlled experiments; fixed and typically little data; probability inferred based upon prior assumptions Prior information abounds and is valuable (previous studies, researcher intuition, subject matter experts, etc ). It is mostly about the priors

8 Goes to heart of risk assessment even for the most quantitative of risks Source: Milliman analysis using Global Financial Data on the All Ordinaries Index

9 But wait, there s more How do you model, predict, explain and communicate the most data rich of risks, market risk? Source: Milliman analysis using Global Financial Data on the All Ordinaries Index

10 Techniques to Characterise Uncertainty and Uncover Conditional Dependencies Statistical analytics Stochastic modelling Causal / structural modelling Stress and reverse stress testing Scenario modelling Predictive analytics Bayesian modelling

11 Discussion Questions Role risk plays in decision making at different corporate levels Useful risk collateral to support decisions Different modelling approaches for different risks? Different communication for different stakeholders Cognitive limitations and behavioural biases Framing risk information Communicating a holistic integrated perspective

12 Practical tips for Communicating the Uncertainty and Ambiguity of Risk Simone Leas Head of Risk and Capital Management Clearview Wealth Limited

13 Whose perspective is right?

14 All this information but keep it simple

15 Clear Visuals

16 External Dealership Corporate Example of Risk Heat Map Governance Strategy MD, SMT Projects & Exec. Capital Expenses HR Mangmt Culture RMF MIS Red Risks xxxxxxxx Distribution Revenue (Products) Front Office Back Office Outsource Fin IFAs Aligned Economy Brand Comp Employed Fin Comp Parra Planners Vol Del Strategic Partners Competitors Life Advise Product Vol Clm Lps Wealth Product Vol Disc MtM Direct Life Vol Clm Lps Investment Perf Treasury SHF Perf Product, Pricing LA LD Wlth Bus Devel Life Wealth Acquisition U/W Adm Maintenance Adm Claims IB Call Centre OB Call Centre Direct Mkting Dealership Support BC Event Exp. Cat. Exposure IT Hardware Production Developmnt Mkting Supp Legal, Comp Int. Audit Finance Commission Unit Pricing Actuarial Risk Mng Product Technology ABC DEF GHI Sky XTP XYZ Other Sys s People Soft, etc etc Reinsurers UP Co Asset Mgrs Regulation Amber Risks 1.Xx 2.Xx Yellow Risks 1.Xx 2.Xx 3.Xx 4.Xx

17 Repetition

18 Start with the basics

19 Simple tips KEEP IT SIMPLE USE CLEAR VISUALS REPEAT YOUR MESSAGE START WITH THE BASICS

20 Risk & Uncertainty Implementing Risk Management Through Culture Kent Griffin, CFO TAL September 2014

21 Risk and Uncertainty Risk management is about Managing Risk ie making decisions Risk let s get this straight up front is good. The point of risk management is not to eliminate it; that would eliminate reward. The point is to manage it that is, to choose where to place bets and where to avoid betting altogether. Fortune, 2000 Despite significant advancements on many fronts, improvements to risk management, if they are to prove durable, require deep cultural transformation and investment in management time, people and finances to successfully execute and institutionalise. Ernst & Young Culture counts. A sound risk culture is likely to lead to the right risk outcomes, while a weak risk culture may promote the wrong outcomes for customers and/or the financial institution itself. Guidance on Supervisory Interaction with Financial Institutions on Risk Culture (A Framework for Assessing Risk Culture), Financial Stability Board, April

22 Effective Risk Management Risk management is only effective if it impacts decision making Promoting the utilisation of the right information, by the right people, at the right time in order to optimise strategic and capital critical decisions. Culture Matters Risk-based Decisions Risk Management Framework Capital Management Framework Risk Appetite Statement Quantitative Risk Measurement Qualitative Assessment A meld of outputs from Strategy, Risk Management, Risk Appetite, Capital Management and Strategic Frameworks Risk-Based Decision Making Decision Culture Right Time and Right People Values Practices Behaviours Judgement Experience Decision making occurs at all levels of the organisation Actuarial analysis and insight must be timely, relevant, well communicated and understandable in the context of the decision which needs to be made. 3

23 Effective Risk Management Culture is the platform which drives risk management Source: Global Regulatory Network Executive Briefing, Ernst & Young, June

24 Defining what good looks like Page 1 Copyright 2014 Ernst & Young Australia. All Rights Reserved. Liability limited by a scheme approved under Professional Standards Legislation

25 Behaviour engineering throughout the three lines of defence Page 2 Copyright 2014 Ernst & Young Australia. All Rights Reserved. Liability limited by a scheme approved under Professional Standards Legislation

26 In summary Does your contribution to risk management impact behaviour? Managing Risk and Uncertainty is first and foremost an exercise in influencing human behaviour Policies, frameworks, governances, reporting, quantitative measures are only effective if they are impacting decision making It is the role of the risk practitioner (eg Actuary) to make their contribution timely, relevant, well communicated and understandable in the context of the decision which needs to be made It is not the role of the decision-maker to necessarily be a risk professional or an actuary ( educating is not an alternative to communicating ) 5

27 Panel Discussion Anton Kapel, Josh Corrigan Simone Leas and Kent Griffin

28