Your SlideShare is downloading. ×
Grant Thornton - Risk appetite: A market study UK 2012
Grant Thornton - Risk appetite: A market study UK 2012
Grant Thornton - Risk appetite: A market study UK 2012
Grant Thornton - Risk appetite: A market study UK 2012
Grant Thornton - Risk appetite: A market study UK 2012
Grant Thornton - Risk appetite: A market study UK 2012
Grant Thornton - Risk appetite: A market study UK 2012
Grant Thornton - Risk appetite: A market study UK 2012
Grant Thornton - Risk appetite: A market study UK 2012
Grant Thornton - Risk appetite: A market study UK 2012
Grant Thornton - Risk appetite: A market study UK 2012
Grant Thornton - Risk appetite: A market study UK 2012
Grant Thornton - Risk appetite: A market study UK 2012
Grant Thornton - Risk appetite: A market study UK 2012
Grant Thornton - Risk appetite: A market study UK 2012
Grant Thornton - Risk appetite: A market study UK 2012
Grant Thornton - Risk appetite: A market study UK 2012
Grant Thornton - Risk appetite: A market study UK 2012
Grant Thornton - Risk appetite: A market study UK 2012
Grant Thornton - Risk appetite: A market study UK 2012
Upcoming SlideShare
Loading in...5
×

Thanks for flagging this SlideShare!

Oops! An error has occurred.

×
Saving this for later? Get the SlideShare app to save on your phone or tablet. Read anywhere, anytime – even offline.
Text the download link to your phone
Standard text messaging rates apply

Grant Thornton - Risk appetite: A market study UK 2012

518

Published on

Grant Thornton's inaugural market study on risk appetite. The Risk Appetite study, the first of its kind, canvassed the views of 43 chief executive officers and managing directors from leading London …

Grant Thornton's inaugural market study on risk appetite. The Risk Appetite study, the first of its kind, canvassed the views of 43 chief executive officers and managing directors from leading London insurers to define current maturity of practice, answering some of the common questions coming out of the market. Our intention is to conduct this study periodically; monitoring overall progress and trends across the market in relation to risk appetite.

Published in: Business, Economy & Finance
0 Comments
0 Likes
Statistics
Notes
  • Be the first to comment

  • Be the first to like this

No Downloads
Views
Total Views
518
On Slideshare
0
From Embeds
0
Number of Embeds
0
Actions
Shares
0
Downloads
14
Comments
0
Likes
0
Embeds 0
No embeds

Report content
Flagged as inappropriate Flag as inappropriate
Flag as inappropriate

Select your reason for flagging this presentation as inappropriate.

Cancel
No notes for slide

Transcript

  • 1. Risk appetiteA market study
  • 2. Contents2 Contents3 Foreword4 Executive summary5 Background6 Approach10 Measures14 Monitoring and reporting18 Future challenges19 Conclusion2 Risk appetite A market study
  • 3. ForewordWelcome to the first Grant Thornton risk appetitemarket study. Recent increased regulatory andsupervisory focus has demanded an articulationof risk appetite and improved decision making fororganisations and this is the first in an ongoing series ofstudies designed to monitor and report on progress andfuture challenges across the market.Our rationale for undertaking the This is purely a study of marketstudy stems from our discussions practice and is not intended towith a range of senior market recommend one approach overparticipants and their general reaction another, it simply conveys what theto understanding the concept of risk market told us.appetite. There was a keen interestinto understanding what everyoneelse was doing and how far theyhad progressed. We also knew thatdemand would be heightened withtimelines looming for delivery of draftOwn Risk and Solvency Assessments(ORSA), in which the risk appetiteframeworks, high level statements, substatements and underlying metrics area key component. Our study set out to define currentmaturity of practice, answering some ofthe common questions coming out of Stephen Kellythe market. Our intention is to conduct Risk and Capital Management Practice Leaderthis study periodically; monitoring T +44 (0)20 7728 3073overall progress and trends across the M +44 (0)7976 963187market in relation to risk appetite. E stephen.f.kelly@uk.gt.com Risk appetite A market study 3
  • 4. Executive summaryThe study highlighted the vital nature of engaging theboard in discussions from day one. Persistency in thisregard has been proven to pay dividends. Notwithstandingthis, the time lapse from commencing efforts to gaininginitial sign-off is averaging at 12-18 months.Those organisations that arrived at the appetite?’ In reality they are symbioticconclusion that their risk appetite was in nature and feed back into each otherinferred in their business plan have in a continuous cycle. Companies aremade more significant progress and flexing their risk appetite to accomodateappear to be better placed to present a the business plan for the coming year,fully cohesive risk appetite framework. where the business case exists. Where Respondents discovered that the it does not, plans are being made to fallvast majority of monitoring metrics within appetite.already existed within the business. It A commonality of measures wereshould be noted that these metrics were arrived at and used by the contributorsheavily driven from the business plan of the study, particularly aroundwhich will not extend to operational ‘Earnings at risk’, ‘Capital at risk’risk metrics. and ‘Solvency at risk’, with most An actuarial led approach was, as companies selecting a variety of ‘returnone would expect, more quantitive period’ outcomes ranging from 1 inin nature and tended to demonstrate 5 year occurrence to 1 in 1000 yeargreater progress. However it also occurrence. The 1 in 5 year and 1 in 10appears responsible for the almost year were found to be driven by theexclusive focus on insurance and to average board tenure. Almost all werea lesser degree, investment risk. The found to be measures of different pointsrisk management led approaches were of the expected probability curve.found to be more qualitative in nature Most companies have now refreshedfocusing on operational risk issues. their reporting in terms of format,Additionally they haven’t achieved the frequency and detail, revisiting whosame degree of buy-in to date. receives which report. High level risk appetite statements The future challenges includedwere, in general, narrative in their initiatives to embed the monitoringstructure with supporting sub and reporting measures into businesscategories designed from a quantitive as usual (BAU) operations and manystanding. respondents are now progressing to the As the business plans of our next stage, introducing a suite of BAUrespondents were heavily influencing performance measures in the businessthe risk appetite frameworks, which support, not only risk appetite,companies began to ask the question but contributes to both the business‘does risk appetite drive the business planning process and the completion ofplan or does the business plan drive risk an organisation’s ORSA.4 Risk appetite A market study
  • 5. Background “You cannot separate appetite from return”The London insurance Specifically this relates to the issues a comprehensive sense of progress, around setting risk appetite for the as well as the difficulties and pressuremarket is enduring a period organisation and determining how points, one of the most significantof significant reform as it to translate that risk appetite into findings of these discussions was thegrapples with increasing meaningful day to day operating limits disparity across participants with and tolerances. It also involves working reference to most aspects of the study.focus from regulators out how to monitor and report on The waters were muddied further fromand market supervisors, adherence to both high level appetite the inconsistency in the use of relatedmost pronounced through and lower level limits. Grant Thornton’s terminology. Rather than force the instinct was that of a market often acceptance of a ‘common language’ theSolvency II, but also relating struggling with the most appropriate more mature organisations, in termsto the market’s own drive approach and facing difficulties in of progress with designing their risktowards greater operational gaining consensus and buy-in from appetite framework, chose to speak toefficiencies. Revised capital relevant stakeholders. their varied audiences in a language that Based on this understanding, Grant those audiences would understand.requirements and redefined Thornton carried out a series of one to Grant Thornton worked on thereporting obligations are one meetings with industry participants overarching hypothesis that whilst ‘topforcing the hand of the who kindly agreed to be involved in an down’ and ‘bottom up’ approaches informal study to examine the current both come with their own merits, earlyindustry and within this; approaches, measures, monitoring adopters or those most advanced will berisk appetite remains one of metrics and reporting formats employed, the participants that manage to combinethe most challenging areas. along with the associated future the two and embed meaningful risk challenges as seen through the eyes of appetite limits and related processes the market. This was designed to allow across the organisation. This report the participants to understand how their relays what we heard from respondents peers were progressing, to observe the without attributing the various findings degree to which the regulators were to any one organisation or person. The guiding this and to understand what were pre-eminence of the Lloyd’s Insurance the challenges and advantages from the market in this study was the result of implementation of certain approaches. proximity and ease of access, but Grant The general enthusiasm and willingness Thornton has brought to bear its own to share experiences demonstrated the experience outside of the London degree to which risk appetite is enjoying Market to substantiate more general its moment in the spotlight. insights and themes. Spanning the full spectrum of the London Insurance Market and providing Risk appetite A market study 5
  • 6. Approach “This is a journey – and education of the board is key”The first and most One of the first things that became wanted to remain part of the majority apparent was that whilst there was no and so, ‘waiting and seeing what yoursignificant area refers to single emerging industry standard, peers were doing’ became a strategy inthe approach that our consistent patterns were emerging when itself for some organisations. Given theparticipants favoured and certain approaches were employed. degree of transparency and availability We observed a distinction between of data through knowledge sharing peerthe rationale behind this. the actuarial led approach of some groups in the market, this may becomeOur working assumption organisations and the risk management an increasingly viable strategy. However,was that most companies led approach of others. As may have with resourcing identified as a general been expected, risk management led challenge, this reactive approach maywould have already started approaches were qualitative and had not suit smaller operations. Indeed,articulating their high level an operational risk bias. Actuarial our findings demonstrated that manyrisk appetite statements lead approaches while quantitative, of those struggling to make notableand begun the process of displayed more discipline and, in progress were held back by resource general, demonstrated greater progress. constraints. In the main, companiescascading these statements In practice, those who have made wanted to avoid being the trail blazers ordown to low level operating the most headway in successfully falling too far behind, due to both theselimits. In doing so, they defining risk appetite have struck positions attracting additional scrutiny a balance between a practical led, from supervisors.may have encountered qualitative risk management method When questioned regarding theirdifficulties in maintaining and the more rigorous and disciplined, approach to different types of risk, thecohesiveness when trying actuarial approach. There was a message was clear that insurance and further distinction between those that (less so) investment risk are the onlyto cascade from the began their efforts from their business areas in which participants were seekingmaster statement down to plan and underlying operating limits to make a return. Within that, insurancesubcategory statements. and worked back up (bottom-up) risk was seen as the key focus with one and those who adopted a top-down respondent commenting: approach from a high level risk appetite statement. Those that worked from “While the net position is important, the ground up were better able to we are an insurance organisation demonstrate a comprehensive and and as such seek to make a gross cohesive risk appetite framework. underwriting profit” In terms of where respondents were positioned on a continuum, the market It was generally observed that had adopted a pack mentality. Keen companies see other risks such as to avoid a public catastrophe, they operational risk or credit risk as6 Risk appetite A market study
  • 7. 2010 Premium IncomeClass of Business Plan Current EPI £ Signed Latest Forecast £ Status Position last CommentsBusiness Projection £ Premium £ monthA 5554629 4818915 2306651 4744090 B 3994299 3889750 1225633 3832445 C 34484702 34686121 19444258 30263913 D 54998777 74405939 59017289 63585477 Comments onE 2964938 2673797 2135218 2488334 current status, recent changes,F 13341423 12893946 9767164 12983274 and foreseenG 3813657 3099983 3306938 3590712 changesH 12056835 21590900 12517968 12274046 I 7131279 6910691 4665524 6168615 J 6686775 5615184 5599111 6168615 K 10951026 8055265 5572418 9851900 L 15810084 18870930 11353116 22319101 Whole £171,788,423 £197,511,421 £136,911,288 £178,270,522 Comment onAccount whole accountunavoidable consequences of being inbusiness which should not be used as “Successful design and embeddinga measure of appetite but simply be of a risk appetite frameworkmitigated against. Fixed limits were demands a huge education andcommonly set for these other risk communication exercise”categories. This led to the development of“We distinguish between risk measures, metrics and thresholds thatmonitoring (eg. reserves, better supported senior managementoperational risk) and those ones decision making. On average companieswhere we have an appetite and seek were taking 12 to 18 months to achievea return (eg. insurance and to a initial sign-off on their high levellesser extent investments)” statement. The statements derived were generally in narrative form, reflectingThe majority of respondents began the practice by organisations of puttingtheir efforts with a workshop with narrative principles in place that addresssenior management, exploring the the qualitative aspects of appetiteprinciples and defining a high level including; the terminology used, thestatement of risk appetite. The more time horizons and confidence levels.advanced participants focused heavilyon educating the board, seeking an “ABC Ltd aim at all times toeffective way of communicating with maintain a 10% buffer above ourthem and other significant stakeholders, regulatory capital requirement”to achieve a consensus. As onecompany commented: Risk appetite A market study 7
  • 8. ApproachSome organisations also surveyed There was a distinct divergence in thethe board and senior management various approaches to achieving theto capture their views and compared underlying numbers. We observedthese to the internal model results. In a general difficulty in cascading thesome instances, there was a remarkably narrative or qualitative statement intostrong correlation between the sub-risk categories. On reaching thisexecutive management view and the juncture, companies appeared to bemodelled output. taking stock and considering other Having agreed the narrative approaches, such as bottom up.principles many respondents next step At this point some respondentswas to follow with the numbers, as concluded that their business plan willsummed up neatly by one company: imply the organisation’s risk appetite, with one company commenting ‘we“Start with the principles, follow with put a lot of effort and discipline intothe numbers” producing our business plan – let’s use that’.2010 Gross Incurred Loss RatioClass of Business Plan Current Latest Forecast Status Position last CommentsBusiness Projection GULR% Incurred LR% ULR% monthA 82% 55% 88% B 58% 3% 60% C 71% 41% 66% D 77% 25% 55% Comments onE 73% 23% 48% current status, recent changes,F 71% 21% 100% and foreseenG 56% 21% 52% changesH 72% 36% 79% I 77% 16% 68% J 61% 53% 91% K 51% 15% 51% L 71% 50% 75% Whole 68% 30% 69% Comment onAccount whole account8 Risk appetite A market study
  • 9. This generally resulted in the categories, allowing companies to make One company, displayed a convictionmeasurement of performance by statements regarding their overall risk that their approach was fully cohesivelooking at variation against plan where profile such as: by demonstrating that they coulda high level statement; narrative and cascade down to specific metricsqualitative in nature, was agreed. The ‘No less than 80% of our capital will and aggregate back to their mastersub-category statements were then support insurance risk’ statement. They extracted their riskderived from a more quantitative appetite from their business plan usingperspective and the supporting metrics, With the previous year’s appetite a disciplined, actuarial led approachlimits and tolerances were generally measures being used as a ‘Stop / that relied heavily on the use of theirarrived at by measuring volatility of Go’ check as part of the business internal model. They were uniqueresults against plan. Those companies planning process. Some companies in demonstrating this cohesiveness.that had made this ‘leap of faith’ had embedded this concept into their However, it was apparent thatconcerning the relationship between the governance structures by designing developing and articulating a narrativebusiness plan and risk appetite found mechanisms to ensure ‘flags’ were describing the qualitative aspects ofthat the vast majority of information escalated to the board. If the plan falls risk appetite, such as terminology,required to monitor risk appetite in the outside of the agreed appetite it will be timeframes/horizons and thenform of metrics and tolerances already flagged and escalated to the appropriate following with the numbers to developexisted within their management forum (risk committee or board) for the underlying, lower level supportinginformation (MI). What followed was challenge and decision. The decision quantitative detail, was a favoureda completeness check for required MI arising is to either adjust the appetite approach.rather than a full scale gap analysis. to accommodate the plan or scaleOne respondent commented ‘Our back the plan to fall within appetite.business plan implies our risk appetite, Respondents were then knowinglytherefore we monitor against plan’. taking risk versus blindly taking riskThis then raised the question of which with the rationale behind the decisionis influencing which, does risk appetite documented and evidenced. Thisinfluence the plan or vice versa? In flexible approach appeared to be thereality one will influence the other most successful, with one organisationand acts as a bench mark to reflect on commentinghistorical performance before agreeingthe business plan for the year ahead. “We are more willing to have a Where companies had undertaken variable result as we are more likelyan analysis of prior performance over to experience better results onthe preceding 5 or more years, there average while maintaining our riskemerged a consistency in the application of ruin”of risk appetite and capital to key risk Risk appetite A market study 9
  • 10. Measures We observed that the majority of respondents settled on a set of measures that, while variations on a theme, were common to most organisations. These measures, in nearly all cases, were different return periods derived from the same Expected Probability (EP) curve. Net Underwriting Profit All figures quoted in £m £60 £50 £40 Budgeted Earnings £30 44.5% Break Even £20 27.9%Profit (£m) £10 Percentile £0 70% 65% 60% 55% 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% -£10 -£20 -£30 -£40 Loss of Buffer 1.2% -£50 Loss of Regulatory Capital -£60 0.05% The graph shows the probabilities of obtaining up to a particular profit. The probabilities of achieving less than the budgeted earnings, and less than the break-even point are identified, as are the probabilities of losing more than the buffer and losing more than the regulatory capital. “All measures come from different parts of the same EP curve” 10 Risk appetite A market study
  • 11. Net Underwriting Profit All figures quoted in £m 25% 20%Probability 15% 10% 5% 0% -90 -80 -70 -60 -50 -40 -30 -20 -10 0 10 20 30 Profit £m 1 in 10 1 in 2 profit 1 in 50 loss 1 in 200 loss 1 in 5 profit Break even 1 in 100 loss PlanThe graph shows the profits/losses associated with a range of pre-defined probabilities.As can be seen in the adjacent exhibitvarious points along the same curve Example Measureshave been selected to satisfy those areas Earnings @ risk - over the planning horizonthat senior management are particularlyinterested in. Capital @ risk – investment return Solvency @ risk – Regulatory 1:200 measure“Earnings, liquidity and capitalare what the Board are concernedabout” Value @ risk measures Regulatory capital ≤ 100% net written premiumThe ‘near’ horizon return periods of 1 Desired net combined Ratio at 1:10 years ≤ 125%in 5 and 1 in 10 years were commonlyselected to reflect the time horizons Desired Net Less Ratio @ 1:10 years ≤ 100%that were of most interest to seniormanagement. Mean – Target return on equity“1:10 return period was chosen as a 1:5 year – Earnings @ risk – probability of lossproxy for average Board tenure” 1:200 year – Capital Adequacy RatioA selection of the most commonly 1:100 year – Concentration riskobserved measures are shown in the • % split by category ≥70% Insuranceexhibit opposite. • % RDS ≤ X% of capital Net tangible assets – Group Measure % Gross written Premium – Syndicate measure Earnings loss as a % of Net Assets gross and net. Risk appetite A market study 11
  • 12. Measures Net Underwriting Profit All figures quoted in £m 100% 26% 24% 22% 80% 20% 18% 60% 16% ProbabilityPercentile 14% 12% 40% 10% 8% 6% 20% 4% 2% 0% 0% -£120 -£110 -£100 -£90 -£80 -£70 -£60 -£50 -£40 -£30 -£20 -£10 £0 £10 £20 £30 £40 £50 £60 £70 £80 £90 £100 £110 £120 Profit (£m) 1 in 10 profit 1 in 2 profit 1 in 50 loss 1 in 200 loss 1 in 5 profit Break even 1 in 100 loss Plan The graph shows the probabilities of achieving different ranges of net underwriting profits, and the cumulative distribution of the profit. Profit and loss probabilities are specified. The profits which are at least achieved at the given probabilities are shown, as are the losses which are at least suffered at the given probabilities. Organisations had generally Some statements of appetite assume them to demonstrate they could undertaken a historical review of past open ‘survival’ of the organisation survive an event that arose from performance against business plan. following back to back catastrophes. anywhere in their portfolio. One company revisited the business Some organisations have developed Respondents were found to be plan to derive a qualitative statement and modelled such scenarios by using making good use of their internal of appetite, defining how much money a tri-metric/tri-peril approach. This model and where an actuarial-led they were willing to lose using the approach combines limit information, approach was employed, there was following underlying metrics: probable maximum loss information a focus on measuring insurance and and catastrophe model output, underwriting risk. • Earnings at risk – over the planning coupled with expert judgement to horizon arrive at an extreme but plausible • Capital at risk – investment return scenario to test their liquidity limits • Solvency at risk – regulatory capital and tolerances and answer the 1:200 measure. question ‘do we have sufficient free funds to survive’. They were seeking to arrive at measures that allowed 12 Risk appetite A market study
  • 13. Net Underwriting Profit All figures quoted in £m 25% 25 20% 20%Probability 15% 15% 10% 10% 5% 5% 0% 0% -40 -30 -20 -10 0 10 20 30 40 Profit £m Plan Lower Quartile (25% deviation from plan) Upper Quartile (25% deviation from plan) The graph shows the probabilities of achieving different ranges of profits, along with a volatility measure showing the extremities of 25% deviations above and below the Plan. Measure Profit £m Plan 9.2 25% positive deviation from Plan 19.2 (10.0 above Plan) 25% negative deviation from Plan -4.2 (13.0 below Plan) Maximum 80.1 Minimum -96.0 Risk appetite A market study 13
  • 14. Monitoring and reportingDue to the general interest, and in some cases requestsfrom study participants, this section includes bothsanitised and hybrid examples showing reportingformats and typical contents generally being deployedacross the market.Enquiries and discussions under thisarea of the study highlighted the fact Quarterly monitoring of risk triggersthat the majority of respondents were Risk Triggers Quarter 1 Quarter 2 Quarter 3 Quarter 4 Commentsin the midst of revisiting and indeedredesigning their reporting formats and Risk 1the content. In some cases companieswere revising committee structures. Given the varying size andcomplexity of insurers that we engaged Risk 2with as part of this study, we observedsome form of proportionality inaction. For example, most companies Narrativehad a small number of committees Risk 3 commentthat would receive risk management explainingreports, others had up to six quarterly movementscommittees comprising for example: Risk 4• Underwriting Committee• Management Committee (dealing with operational issues)• Finance Committee Risk 5• Reserving Committee• Risk and Capital Committee and• Delegated Underwriting Committee. Risk 6In a number of cases, managementinformation while produced monthlywas reported quarterly. A number of basis. We observed that, in a number of by risk category, had in an effort toorganisations were reappraising the instances, insurers were redesigning or embed it into the business, structuredreporting frequencies for different indeed designing for the first time, risk their statements by function/practicerisk categories though one common dashboard reports or ‘flash’ reports area: pricing, exposure management,theme was the use of the Own Risk with the information specifically credit control and business planning.and Solvency Assessment (ORSA) as targeted for the end users.a vehicle for reporting summary risk Some companies, rather thanappetite information on a quarterly organise their risk appetite statements14 Risk appetite A market study
  • 15. Likelihood and volatility of risks in and out of appetite CriticalSignificant Minor Unlikely Likely Capital risks Insurance risks Liquidity risks Market risks Insurance risksThere was a definite trend towards such as exposure management reports in most situations that these metricscompanies marrying risk management addressing catastrophe risk. These already exist and are generally beinginformation (using a variety of risk range between 20 to 25 pages with a reported as part of the current suite ofappetite monitoring metrics) and single page dashboard for the board. management information. This reflectsperformance management information. Similarly, it is common for the Chief the growing recognition among insurersIndeed a number of organisations had Risk Officer report to cover the whole that their business plan implies their riskdeveloped online dashboards with a risk management process. However it appetite, and by inference monitoringscreen for each of their supporting could be seen that a number of insurers performance against plan is a proxy forrisk appetite statements. In general were making efforts to present risk monitoring risk appetite. This avoidscompanies were reporting monthly information in a wide variety of formats the development of standalone riskby exception across areas such as large to meet the needs of the wide variety of monitoring metrics that have limitedlosses, breach of tolerances and control users of the information. business use.effectiveness. A number of standing With respect to the monitoring ofreports remain comprehensive in nature risk appetite metrics, it is apparent Risk appetite A market study 15
  • 16. Monitoring and reportingWe were keen to discover Underwriting risk Red Level Amber Level Green Levelthe way companies were Appetite statement handling risk appetite Amounts written in each class are > x% y% to x% < y%reporting including the not to exceed x% of ABC’s book as wholeformat, frequency and Deviation from average line written > x% y% to x% < y%sorts of data captured. Our not to exceed x%hypothesis being it was Planned LR not to be exceeded > x% y% to x% < y%clear that the reporting by x%of risk appetite should Reserving risk Red Level Amber Level Green Levelleverage a whole raft of Appetite statementdata that currently exists. Deterioration of reserves is not to > b% c% to b% < c%It would just need to be exceed b% in any one quarter interrogated to the required 1-in-200 deviation not to exceed > b% c% to b% < c%level of granularity and b% of gross incomepresented in the most Credit risk Red Level Amber Level Green Levelmeaningful format to suit Appetite statementthe audience. A particular more than p% exposure to be No > p% q% to p% < q%challenge was the setting held by any one counterpartyof threshold metrics to Aged debtor position is not to > k days m to k days < m daysmeasure volatility on a exceed k dayswhole account and by line Reinsurance risk Red Level Amber Level Green Levelof business. This was seen Appetite statementas a key measure. Exposure to any single reinsurer y% to x% z% to y% < z% is to be less than x% Aged debtor position is not to > k days m to k days < m days exceed k days Ensure that reinsurers have a Any rating less credit rating not less than AA than AA16 Risk appetite A market study
  • 17. Typical reporting structures and Operational risk Red Level Amber Level Green Levelformats state the target risk appetite, Appetite statementRAG rates the deviation against the selected metrics supplemented with tolerance for acceptance Zero Any riskexplanatory narrative text. With some of risks outside of the approved companies comparing total capital business planconsumed to available funds. We also tolerance for regulatory Zero FSA reprimandfound that most organisations were interventions such as FSA s166making a concerted effort to build Tolerate material IT systems failure > v hours w to v hours < w hoursmonitoring of risk appetite into their for no more than v hoursbusiness as usual operations whichwill ultimately ensure the reporting Market risk Red Level Amber Level Green Levelprocess becomes more embedded Appetite statementwithin the organisation. Risk appetite was generally reported in dashboard probability of negative return The x% y% z%form, monitoring targeted risk appetite in any year should not exceed x%performance against deviation from a do not expect to lose q% of ABC q% p% r%set of metrics defining acceptable and capital due to FX risk more thanunacceptable thresholds. Dashboards once every B yearswere supported by a narrative,detailing the findings across the Liquidity risk Red Level Amber Level Green Levelquarter. Appetite statement At a minimum, hold sufficient Funds fall short (100-a)% (100-b)% funds to meet estimated of estimated liabilities when they fall due liabilities Liquidity must be sufficient to Insufficient (100-c)% (100-d)% meet an RDS event without to cope with unnecessary cost to ABC simulated RDS “A distinction is generally drawn between monitoring and appetite” Risk appetite A market study 17
  • 18. Future challengesMany companies cited ‘going live’ with new committeestructures, reporting formats and frequencies.There was a general acknowledgement Many organisations were consideringthat transitioning into business as usual allocation of capital across lines ofwould be an iterative and educational business and looking to build on theprocess. Some organisations are work to date to introduce some form oflooking at developing ‘entity level risk risk adjusted return on capital.tolerances’ as well as grouping those A key future challenge is that oftolerances across the business. Other finding thinking time and breathingcompanies were undertaking a proof space to conduct much needed analysis.of concept around their risk appetite A number of organisations have targetedframework , testing how it sits together the automation/industrialising of riskand works in practice. The message appetite reporting as key to the objectivewas clear that there was more work of achieving more time analysing – andto be done to fully understand the less time producing.risk exposures of many businesses.“We want to determine how muchcapital is being consumed by lineof business and compare thatwith available capital”18 Risk appetite A market study
  • 19. ConclusionGrant Thornton observed a broad range of practicesin the market, each with varying degrees of success.Respondents had adopted a pack mentality when itcame to progress, eager not to draw undue attention tothemselves from supervisors, either by leading the packor lagging behind.On the whole, the market has made That progress aside, there is anstrong progress that has been enabled underlying danger that other areasthrough iterative education of the of risk may be being overlooked,board and senior management. operational risk for example; withUnsurprisingly, given the need to history indicating that this is theintroduce greater quantification most consistent driver in the collapserespondents made a conscious decision of insurance companies, e.g. Sharmato focus the majority of their efforts 2002, and Ashby and Sharma 2003. Inon insurance risk and, to a lesser conclusion, any high level risk appetiteextent, investment risk. Within that framework that is not balanced in itswe observed significant progress inclusion of other significant areas ofin underwriting, with a variety of risk, irrespective of whether or notmonitoring metrics derived from the they generate a return, may be subbusiness plan and appropriate triggers optimal in its effectiveness.and thresholds reporting on volatilityof results against plan.For more information please visit:www.grant-thornton.co.uk/riskappetite Risk appetite A market study 19
  • 20. © 2012 Grant Thornton UK LLP. All rights reserved.‘Grant Thornton’ means Grant Thornton UK LLP, a limitedliability partnership.Grant Thornton is a member firm of Grant Thornton International Ltd(Grant Thornton International). References to ‘Grant Thornton’ are to thebrand under which the Grant Thornton member firms operate and referto one or more member firms, as the context requires. Grant ThorntonInternational and the member firms are not a worldwide partnership.Services are delivered independently by member firms, which are notresponsible for the services or activities of one another. Grant ThorntonInternational does not provide services to clients.This publication has been prepared only as a guide.No responsibility can be accepted by us for loss occasionedto any person acting or refraining from acting as a result ofany material in this publication. 21744grant-thornton.co.uk

×