Critical Reflection of Two State-of-the-Art Risk Management Frameworks (SRM004)

Transcription

1

2 Critical Reflection of Two State-of-the-Art Risk Management Frameworks (SRM004) Speakers: Dr. Kathrin Anne Meier, Chief Risk Officer, Allianz Global Corporate & Specialty John Adams, VP Global ERM, PepsiCo

3 Content 1. Allianz Risk Management Framework 2. PepsiCo Risk Management Framework 3. Discussion of selected Risk Management Elements 4. Summary and Q&A

4 Learning Objectives At the end of this session, you will: Understand critical elements of a comprehensive Risk Management framework Better understand how two different companies approach governance, risk tolerance and risk identification approaches

5 Allianz Over 85 million Allianz customers 122.3bn in Revenue: among the top 30 of the world s largest corporations based on revenues 10.4bn Operating Profit Net income attributable to shareholders of 6.2bn Number 1 in P&C business globally: P&C segment delivered more than half of Allianz Group s operating profit, with 5.4bn; Gross Written Premium rose to 48.3bn Among the top 5 in Life/Health business worldwide: statutory premiums grew by 18.6% to 67.3bn from 56.8bn in 2013 Number 1 in Credit insurance globally One of the largest Asset Managers globally Worldwide leader in travel insurance, assistance services and personal services All figures as per 12/31/2014

6 Allianz Global Corporate & Specialty Allianz s center of excellence for corporate clients and mid-sized businesses with complex and specialized insurance and risk control needs. Diversified product portfolio Wide range of complementary services, including specialist non-traditional risk transfer solutions provided by our subsidiary Allianz Risk Transfer Financial strength: 5.4 billion Gross Written Premium (2014)* Consistently strong ratings: AA ( Very Strong ) from Standard & Poor s, A+ ( Superior ) from A.M. Best** Global reach: integrated in the Allianz network of more than 160 countries worldwide Extensive international experience: manages some 2,300 International Insurance Programs More than 3,600 dedicated employees * All Allianz Global Corporate & Specialty companies ** Allianz Global Corporate & Specialty, correct as at 02/2015

7 Allianz Risk Framework Set-up driven by various internal and external requirements Taking on and managing risks is Allianz' core competency and we continuously improve and adapt our risk framework to the needs of Allianz, its clients and other external stakeholders (Regulators: in particular Solvency II (SII) in Europe and other new Solvency regimes, Rating Agencies) Set-up influenced by introduction of SII SII initiated because of capital market crisis at the beginning of this century Economic risk-based solvency capital regime (as from 1 Jan 2016) Linkage between risk and capital Crucial role to be played by risk management Well developed risk culture with the right tone from the top

8 Role of Risk Management under SII SII Directive establishes ground rules for good governance Key functions: Risk Management, Actuarial, Compliance, Internal Audit Three lines of defense, key functions are independent Documented policies and evidence of implementation and effectiveness Fit & proper requirements for persons running the business The Risk Management system under SII Must comprise strategies, processes, continuous reporting on risks at individual and aggregated level as well as their interdependencies Must be effective and well integrated into organizational structure and in decision-making process Companies are required to conduct ORSA Regular and ad-hoc Own Risk and Solvency Assessments (ORSA) to determine the Solvency Capital Requirement risk measure and calibration

9 Added Value by Risk Management

10 Governance Structure Allianz Group Allianz Global Coporate & Specialty Risk Committee (board committee) Chief Risk Officer Function / Project Branch Subsidiary Allianz Group Risk Committee Allianz Group Risk Sound Governance Structure where decisions are delegated to Committees Risk Committee tasks: To decide on structure and scope of risk and control frameworks To review ORSA, Internal Control System, procedures for identification, assessment and reporting of risks To propose risk mitigation actions To overview risk landscape To decide and monitor risk tolerance Quarterly Risk Committee meetings

11 Policy Framework Our Governance framework consists of ten policies and various underlying standards and functional rules:

12 Risk Policy Framework How business is steered and controlled within the company is documented in a set of corporate rules, establishing binding regulation and guidelines within the company

13 Risk Management Process Our Top Risk Assessment process is managed in four steps: Risk Management Process Identification Analysis & Evaluation Steering Monitoring Objective Be aware of the most material risks Allianz is exposed to Be in a position to judge the main impacts on Allianz Take measures necessary to limit risks and focus risk mitigating measures Monitor risk developments and changes in the risk environment Risk Scenarios Heat Map Risk Report and Quarterly Risk Updates Tools

14 Risk Categories Market Risk: changes in market prices (e.g. driven by equity prices, interest rates, real estate prices, exchange rates, credit spreads and implied volatilities). Credit Risk: deterioration in the credit quality of counterparties. Liquidity Risk: failure to meet payment obligations, and/or refinancing is only possible at higher interest rates or by liquidating assets at a discount. Underwriting Risk: inadequacy of reserves or unpredictability of mortality or longevity. Business Risk: decrease in actual results compared to business assumptions. This includes lapse risk. Operational Risk: inadequate or failed internal processes and systems, from human misbehavior/errors or from external events. Reputational Risk: drop in the value of Allianz caused by a decline in the reputation. Strategic Risk: negative changes in Allianz s value arising from the adverse effect of management decisions regarding business strategies and their implementation

15 Risk Strategy The Risk Tolerance System is governed in the Risk Strategy: Capital Adequacy Limits Risk Strategy Target Ratings for Top Risks Internal Risk Capital Risk Standards Retention Management Principles Financial Limits

16 Capital Model Internal Model is used for capital management Solvency capital calculation Stress testing Assets Liabilities Free Assets Internal Model is used in business decisions Incorporation in pricing tools Used for outwards reinsurance structuring Internal Model is used to steer business RoRC (Return on Risk Capital) as forward-looking profitability measure RoRC = Economic Profit : Risk Capital Comparison of relative economic attractiveness of lines of business Market value of assets SCR MCR Technical Provisions SCR: Solvency Capital Ratio MCR: Minimum Capital Ratio

17 Risk Reporting Internal / Regulatory Reporting on Risk Quarterly Risk report on risk landscape, risk tolerances and mitigation actions to Senior Management and Regulator Annual & ad-hoc ORSA reports on assessment of overall risk position and solvency needs, ensuring business underwritten is supported by right amount of capital Regular Supervisory Report Quantitative Reporting Templates to Regulator Public Disclosure on Risk Annual Solvency and Financial Condition Report to public

18 PepsiCo Leading global food and beverage company with a portfolio of iconic brands 2014 full year results; Market Capitalization as of 4/1/15 Ø $66 Billion in revenue 51% US, 49% Int l Foods: 53%; Beverages: 47% Ø 22 Billion dollar brands Ø Available in more than 200 countries and territories Ø ~20% of revenue in nutrition Ø Market capitalization - $142bn Ø Largest Food & Bev. contributor to US retail sales growth Ø 10 of the top 50 new Food and Beverage launches in North America in 14

19 PepsiCo Risk Framework

20 Governance Model

21 Executive Risk Committees

22 Corporate Risk Management Office (RMO) RMO role: Ø Ø Ø Ø Ø Ø Set the PepsiCo ERM agenda Define the framework, establish the processes, develop tools Engage with Corporate/Sectors to identify and assess risks and ensure risk owners are identified and mitigation plans put in place Ensure on-going risk monitoring and reporting to the PRC and the Board Educate the organization on ERM and drive best practice sharing Build further risk capability and drive program improvements To be effec(ve, the RMO needs to work collabora(vely with the sectors and other corporate func(ons

23 Risk Categories Risk Category Strategic Definition Risks that can have a material impact on our strategic objectives arising from internal or external factors Opera(ng Regulatory Financial Issues which may affect or compromise execution of business functions Governmental/NGO actions that can have a material impact on the achievement of our business objectives or an adverse impact on our reputation or sustainability Risks which can cause unexpected variability or volatility in our topline, margins, EPS or returns

24 End-to-End Process

25 Risk Identification

26 Prioritization and Assessment

27 Risk Mitigation Ø Risk owner identified and accountability established Ø Simply stated definition of the risk describing how it may impact the achievement of our business objectives and the impact of the risk occurring Ø Discussion of risk mitigation plans already in place, progress made to date, and additional mitigation actions that we will take to further mitigate the risk Ø Identification of additional capital and/or resources required or new capabilities Ø The targeted end-state, what does success look like Ø Key milestones and metrics that we will use to monitor our progress Ø Risk tolerance

28 Monitoring Progress Simple, concise risk Dashboards and Scorecards are used to monitor and report our risk mitigation progress Risk Dashboard Risk Scorecard

29 Embedded in Core Processes Strategic Planning Ø Identification of the top risks to achieving each strategic objective Ø Template to facilitate discussions at strategic plan meetings Ø Discussion of the top risks during strategic plan presentations Capital Investment Decisions (Capex) Ø Risk Assessment template required for all capexes above a certain threshold to address various non-financial business risks Ø Key project risks are identified and communicated to ensure the appropriate risk tradeoff decisions Ø RMO represented on the capex committee for review/approval of investment decisions M&A Due Diligence Ø Due Diligence checklist revised to ensure all appropriate non-financial risks are identified and mitigation costs considered in our assessment and negotiations.

30 Cadence For Review

31 Discussion Governance Allianz Effective system of governance ensured by a transparent organizational structure with a clear allocation and appropriate segregation of responsibilities Risk Committee is Executive Committee, chaired by the CFO Risk Management is the process owner Risk Management reports into CFO Documentation (polices, standards, etc.) clarifies roles and responsibilities PepsiCo Board has oversight of the top PepsiCo risks Executive risk committee chaired by the CEO Risk committees at the Sector and key Country level Audit Committee is the process owner; Risk Management office is the corporate process owner Risk Management reports into Strategy Group and CFO Three lines of defense principle applied Documented process to ensure consistency across the organization

32 Discussion Risk Tolerance Allianz Limits applied not only to market, credit and insurance risk, but also to operational risk, e.g. key risk indicators on data quality risk, IT risk, key personnel risk Risk appetite to be decided by Executive Management based on Risk Management s risk tolerance proposal. This is captured in the Risk Strategy. The Risk Strategy is to be aligned with the business strategy PepsiCo Limits managed by the business divisions and functions, e.g. Finance, etc. Applies to specific risks Integration of risk into business strategy and capital investment decisions Driven by business strategies Targeted end state developed for each risk

33 Discussion Risk Identification Allianz Internal and external input to risk landscape Many risk assessments and workshops (operational risk, compliance risk) Emerging risk identification Scenario building helps greatly to discuss about risks Risk Ownership on top management level is key PepsiCo Top down and bottom up process Includes both internal and external perspectives Includes existing and emerging risks Formal annual process; ongoing identification and escalation as warranted Tools to assist the process country level risk survey Scenario analysis used selectively

34 Summary A sound risk management framework addresses: Risk governance, incl. documented processes, procedures and policies All risk types at individual, aggregated and interdependent levels Decision-making processes, e.g. limit systems Important elements: The tone from the top is indispensable for a good risk culture Risk management should be embedded at all levels of the organization Operational independence of Risk Management department is needed Quantitative assessments should always be complemented by qualitative assessments In general: Risk management should not prevent deals but should help the company to execute its risk strategy in a controlled way Risk management should aid the businesses in the achievement of their short and long term goals and inform and improve senior management s allocation of resources and decision making

35 Q & A

36 Back Up

37 Solvency II Basic Architecture Solvency II Pillar 1 Pillar 2 Pillar 3 Quantitative requirements Market-consistent valuation of assets and liabilities Own Funds Risk-based Solvency Capital Requirement Qualitative requirements and supervisory review System of Governance Own Risk and Solvency Assessment Internal Model Governance Use Test Supervisory review process Supervisory reporting and public disclosure Regular Supervisory Reporting Solvency and Financial Condition Report Support of risk-based supervision through market mechanisms

38 Three Lines of Defense 1 st Line of Defense Business Underwriting, Pricing, Claims, Finance, Human Resources, Distribution Management, Customer Service, Agents, etc 2 nd Line of Defense Control Functions Risk Management, Compliance, Actuarial, Legal 3 rd Line of Defense Internal Audit Internal Audit Management, Board Members, CEOs, Business Unit Managers, etc. Senior management is ultimately responsible for both the profitability and risk in their business Design control environment Develop frameworks Support business for managing risks Independent risk oversight Monitor and control risk exposure Challenge risk management controls, processes and systems Independent verification that policies are being adhered to and control environment is effective