SYNOPSIS. Key words: Longevity risk, risk transfer, smoothing returns, efficient structuring, tax

Transcription

1 ADVANTAGE ACTUARIES USING LONGEVITY RISK TO BORROW AT -36% Eric Ranson Key words: Longevity risk, risk transfer, smoothing returns, efficient structuring, tax Purpose of your paper: To show how actuaries with their broad expertise can produce better financial outcomes. Synopsis: What are the important features of financial products in a low inflation and high cost environment? The paper discusses how the unique mixture of actuarial skills can be used to provide useful financial product with an example to demonstrate.

2 EMBEDDING AND DERIVING VALUE FROM AN EFFECTIVE RISK CULTURE John Nicholls and Michael Seymour Key words: risk culture, enterprise risk management, change management Purpose of your paper: Risk culture, central to any enterprise risk management framework, can impact financial performance. We discuss what characterises an effective risk culture, how risk culture can add value in insurance and a comprehensive process which can be used to embed risk culture across an organization. Synopsis: The importance of managing risk culture is gaining an increased focus as risk culture is at the heart of an integrated risk framework. In a 2012 industry wide Enterprise Risk Management (ERM) survey conducted by Towers Watson, 80 percent of respondents reported that risk culture is a highly important part of their end-state vision of ERM. Risk culture was reported to be a major contributor to business performance, and organisations have planned significant further development of risk culture. Key risk culture challenges remain including the need to align performance management and incentive remuneration with key risk metrics. While there is no definitive model of risk culture, there are some features that effective risk cultures share. These include effective leadership, open sharing of information, timely escalation of bad news, managing and rewarding appropriate behavior, and the ability to learn from past experiences. An effective risk culture has the ability to add value in insurance by: - enabling effective decision making; - improving value from risk models; - lowering the cost of risk governance; - enabling a good relationship with the regulator; and - sustaining business performance. We will discuss a comprehensive five step process that can be used to embed risk culture across an organization:

3 OPERATIONAL RISK MODELLING WHAT IS CURRENTLY POSSIBLE? Ben Cooper, Bartosz Piwcewicz, Nic Warren Key words: Capital modelling, operational risk Purpose of your paper: Discuss current market practice and key issues and challenges in operational risk modelling Synopsis: Operational risk modelling for capital purpose is a difficult topic and ARPA s and industry s views on what is possible are not well aligned. We review current market practice and share some lessons that we have learned through our own work in this space. The key purpose of this paper is to discuss what is possible when it comes to modelling operational risk for capital purposes given internal and external information available to organisations. In writing this paper, we engage with operational risk modelling experts across a number of key financial institutions to highlight key issues and challenges faced in operational risk modelling for capital purposes.

4 RISK ENGINEERING Gloria Yu, Brendan Fehon Key words: Risk Management, Risk Culture, Risk Appetite, Organisational Change, Actuarial Purpose of your paper: Risk management is embedded into engineering processes, which is in contrast to how it often is in the financial services industry. This paper sets out practical examples showing how engineering puts risk management theory into practice. Synopsis: In construction, an engineer succeeds when the underlying structure does not take away from the purpose of the structure. Good risk management does not operate in a silo, but is embedded in day-to-day processes, supporting business to achieve its primary goals. Risk management is engrained into engineers mindsets throughout every stage of the design and construction process. Engineers design and manage using a principles-based approach which allows them to respond efficiently and effectively to unforseen circumstance. In financial services, risk management is often seen as an adjunct to business processes and externally-imposed frameworks from regulators may encourage a compliance focus to risk management. This paper explores an engineering construction project of an iconic Sydney building and the risk management considerations along the way. It examines how risk management is conducted in the engineering profession and considers aspects which the financial services industry can learn and adopt.

5 RISK CULTURE LEADERSHIP, MEASUREMENT & MANAGEMENT A COMPARISON ACROSS INDUSTIRES Sean McGing and Andrew Brown Key words: Leadership, board, risk, opportunity, enterprise risk management, risk culture, mature risk culture, risk questionnaire, financial services, banking, insurance, superannuation, education, healthcare, energy. Purpose of your paper: The objectives of the paper are: 1. To demonstrate how an organisation's risk culture can be measured. 2. To illustrate how good leadership and management, guided by these risk culture measurements, can reduce risk and enhance performance by moving the organisation towards a mature risk culture. 3. To compare and contrast how organisations in a range of industries identify and seek to improve their risk cultures. Synopsis: The paper explores how good leadership and management in an organisation, when guided by risk culture measurement, can reduce risk and enhance performance by moving the organisation towards a more mature risk culture. An organisation's behaviour varies with a wide range of attributes and environment - for example nature of business, scale, geographic location, commercial environment, values, strategic goals and not least its appetite for risk. How it instills that risk appetite and related actions in its people and translates risk and opportunity into a profitable business, a successful government department or improved quality of life for the community in a not for profit, will vary across industries. So too will the optimal risk management framework with its policies, systems, processes, controls and procedures. The paper compares and contrasts how organisations identify, measure and seek to improve their risk cultures. We do this for four contrasting industries - financial services, energy, healthcare and education. Within financial services we consider the variations between banking, life insurance and superannuation. As a basis for the comparison we picked a sample of companies and identified their values, strategic goals and operational structures. We considered their risks and how their risk management framework and the tools used seek to minimise the downside of those risks and maximise the upside. We overlayed this with an assessment of how the risk culture of the organisation might affect the inputs to those risks - setting strategy, decision making at all levels, controls, reporting and the three lines of defence - at the coal face, the risk function headed by the Chief Risk Officer (CRO) and audit. A key element of our assessment is our design of a risk culture questionnaire which is completed by each sample organisation's CRO. We complement this with interviews of the CROs and a benchmarking of the questionnaires' responses against 3rd party database responses. We present our findings including comparisons of risk practices and maturity levels, draw conclusions and make recommendations on how to measure and manage risk culture, and what each of the disparate industries might learn from each other.

6 THE SYSTEMATIC DEBATE SHIFTS TO INSURERS: THE LIKELY IMPLICATIONS FOR AUSTRALIAN INSURERS Rob Curtis Purpose of your paper: This session will outline the key issues currently being debated and outline the major implications expected for Australian insurers and what actions can be taken now to begin preparing for such requirements from APRA (expected early next year). Synopsis: The IAIS is participating in a global initiative along with other standard setters under the auspices of the Financial Stability Board (FSB) and G20, to identify global systemically important financial institutions (G-SIFI s) whose distress or disorderly failure would cause significant disruption to the global financial system or economic activity. To this end, nine Global Systemically Important Insurers (G-SIIs) have so far been designated, with the likely inclusion of reinsurers being designated this July. While Australia does not yet have any firms designated at the global level, it is very likely that APRA will nonetheless apply, as per many other jurisdictions, a similar set of requirements for Domestic Significantly Important Insurers (D-SIIs). The implications for insurer s may be significant, for example: Requiring adequate and robust risk management systems and process capable of measuring the impact that severe stresses may have on the business model; The ability to undertake a map of critical functions to legal entities to ascertain which business critical processes and operations are essential in the event that a systemic event is experienced; The ability to maintain and fund operations of critical functions and the resultant implications to conserve or restore the insurer s own funds; The sufficiency of funding arrangements and ensure adequate access to contingency funding sources at appropriate cost, including in extreme stress scenarios; and Having the relevant information on group structures, intra-group exposures and exposures to counterparties, other intra-group interdependencies and service level agreements (including contingency plans in case of internal/external outsource provider failure).

7 STRESS TESTING IN A CHANGING WORLD Garreth Sweeney, Anthony Bice Key words: Stress and scenario testing, risk appetite, business strategy Purpose of your paper: To summarise the practical application of stress testing in the context of new prudential standards (eg. LAGIC, Level 3) and how stress testing can influence business strategy. Synopsis: Stress testing is a vital component of contemporary risk management frameworks. Its importance in financial organisations is further underscored by recent prudential standards and the focus given to it by regulators. Implementing a successful stress testing framework requires engagement and support from multiple stakeholders including the board, senior management, risk professionals and business experts. If done well, effective stress testing can also be used to influence business strategy.

8 VIRTUE, HUBRIS AND RISK CULTURE Anthony Asher, Victoria Clout, Tracy Wilcox Key words: Risk management, virtue, integrity, reintegrative shaming, narcissistic organizations, compliance Purpose of your paper: This paper suggests that risk culture is primarily a matter of integrity and courage to stand against hubris. Failing to recognise this can lead to over-regulation and wasted compliance. Synopsis: Most of what is written about risk culture suggests that there are a variety of alternatives that can be chosen by the board and imposed on the organization. This paper suggests, rather, that risk culture is primarily a matter of integrity and a steadfast opposition to hubris and narcissistic traits. To many, good risk management consists of well documented and clearly articulated risk strategies and responsibilities, with deep understanding of measurable risk. In financial organisations regulators have encouraged if not required voluminous documentation, separate functional areas and elaborate models. We suggest that risk culture flows largely from the integrity and deep expertise of the Board and most senior management. Regulation has in fact largely missed the point by focusing too much on form rather than content and exacerbated poor management practice by encouraging hypocrisy. Material that is irrelevant, unsustainable, or produced purely for compliance, undermines integrity - as it at best meaningless and often hypocritical. In this category, we include: Excessive documentation that is necessarily unread Elaborate models with unexamined assumptions or no obvious application. In the former, we include pro-cyclical credit models and group risk insurance rates; for the latter, operational risk models are a particularly egregious example Managerial appointments with minimal industry knowledge There are two arguments against over-elaborate models. The first is made persuasively in Haldane and Madouros (2012): the complex models do not work as well. The second is that the results are not material especially when it comes to operational risk. In spite of the huge effort applied to operational risk capital, Basle(2006) notes that in respect of actually doing something to related this to their business environment and internal control factors, the practice for many banks is still very much in its formative stages. Given that the lead to an increase in capital of only some 10% (which falls below the level of materiality normally recognised by law), it must be asked whether the effort is of any value. The same can be said of the operational capital reserves of 0.25% recently introduced by APRA for superannuation funds. Asher and Duncanson (2008) argue that 0.25% is well below the level of materiality. On the other hand, inadequate emphasis appears to be placed on identifying narcissistic organizations (see Grant and McPhee, 2103) ensuring that enough senior people have sufficient experience to make a real contribution to the business and to challenge inappropriate behaviour by dominant and often narcissistic individuals. Chapple et al (2013) find these to be major correlates of successful class actions. A particular problem faced by actuaries and accountants in their professional capacity is the manipulation of accounts identified in 20% of the companies investigated by Dichev et al (2013). If the CEO and CFO are manipulating accounts and deceiving shareholders, then this would seem to undermine the integrity of the entire organization and be a major indicator of higher risks.

9 Together with a focus on a more active pursuit of integrity, we need a doctrine of what Braithwaite (2002) calls restorative justice that shames, forgives and re-integrates offenders. Braithwaite s (2012) suggestion of enrolling insiders in the pursuit of unjust gain also merits consideration.