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What is the interplay between the intrinsic qualities of the risks that financial firms take? How can risks be properly identified, assessed and monitored so managers can take pragmatic and meaningful ...

What is the interplay between the intrinsic qualities of the risks that financial firms take? How can risks be properly identified, assessed and monitored so managers can take pragmatic and meaningful decisions that mitigate these risks and thus enable business viability and indeed growth? What should be done to make changes that target and address risk effectively? How should the change be managed?

In order to analyze the relevance of these questions within ICMIF membership, Risk Dynamics undertook a risk management survey to measure the risk management maturity of ICMIF members. The study was conducted online during August and September 2011. More in-depth interviews have also been conducted with some respondents to refine the survey results and their interpretation. Additional insights for this report were derived from Risk Dynamics’ experience working with leading financial institutions around the world.

The results were presented by Dr Dominique Bourrat in Risk Dynamics Supporting Member Workshop on Thursday 27 October 2011 during ICMIF’s conference in Manchester UK. They allowed each member to benchmark itself versus others and provide a reality check as to where the sector stands in terms of risk management practice.

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    ICMIF risk management survey ICMIF risk management survey Presentation Transcript

    • ine) w 32 Risk Management Maturity Assessment Surveynes) ICMIF Biennial Conference 2011 w 20 Alw lette Dr Dominique Bourrat – Managing Partner subTitle w 14 ine) YYY w 18 Manchester, October 26th 2011 CONFIDENTIAL tent Do nmage on to on side
    • Alw lette sub verb Higrity CONFIDENTIALITY Management consulting is a competitive business. Intr We view our methodologies and approaches as proprietary and therefore expect our clients to protect Risk Dynamics interests in our presentations, documents and analyses. Under no circumstances should this material be shared with any third party without the written consent of Risk Dynamics. Sep Copyright © 2011 Risk Dynamics •  slide © Risk Dynamics - Confidential ICMIF Biennal Conference - Risk Management Matirity Assessment Survey 26/10/2011 2 •  Com
    • Alw lette About the Survey (1) sub verb "   First edition of our global analysis of the risk management maturity level Higrity within ICMIF membership "   Only ICMIF members were invited to participate "   62 answered the survey Intr "   More in-depth interviews have been conducted with some respondents to refine the survey results and their interpretation "   The study was conducted online during August and September 2011 "   Additional insights for this report were derived from Risk Dynamics’ experience working with leading financial institutions around the world Sep •  slide © Risk Dynamics - Confidential ICMIF Biennal Conference - Risk Management Matirity Assessment Survey 26/10/2011 3 •  Com
    • Alw lette About the Survey (2) sub verb "   The population of respondents was spread out in terms of geographical Higrity base, premium income and demographics Intr Sep •  slide © Risk Dynamics - Confidential ICMIF Biennal Conference - Risk Management Matirity Assessment Survey 26/10/2011 4 •  Com
    • Governance (1) Alw lette sub Introduction verb "   Proper risk governance generates the following benefits Higrity ●  Formulation and endorsement of an institution’s risk appetite, risk strategy and capital management ●  Overseeing of the evolution of the risk profile ●  Ensuring the proper development, implementation and maintenance of the risk management framework in line with the institution’s strategy Intr ●  Infusion across the organisation of a risk/return philosophy enabling an effective delegation scheme "   Understanding of risk ●  Overall, the understanding of risk at strategic decision making level seems comfortable ●  Only a very few respondents feel that their Board members have a good enough grasping of risk to assert that it is indeed embedded within business strategy Sep •  slide © Risk Dynamics - Confidential ICMIF Biennal Conference - Risk Management Matirity Assessment Survey 26/10/2011 5 •  Com
    • Governance (2) Alw lette sub Understanding of Risk verb "   Overall, the understanding of risk at strategic decision making level Higrity seems comfortable "   Only a very few respondents feel that their Board members have a good enough grasping of risk to assert that it is indeed embedded within business strategy Intr Sep •  slide © Risk Dynamics - Confidential ICMIF Biennal Conference - Risk Management Matirity Assessment Survey 26/10/2011 6 •  Com
    • Governance (3) Alw lette sub Risk Organisation verb "   A large majority of the respondents assert that a Chief Risk Officer has Higrity been appointed internally. In the same vein, even more institutions organise a Risk Committee regularly "   Within the group of mutuals with no CRO and no Risk Committee, more than three quarters of them have a premium income below the $500 Intr million mark "   As to what a Risk Committee covers, practice varies widely between one institution and another Sep •  slide © Risk Dynamics - Confidential ICMIF Biennal Conference - Risk Management Matirity Assessment Survey 26/10/2011 7 •  Com
    • Governance (4) Alw lette sub Outlook verb "   There is no established best practice within the group surveyed as to Higrity what a Risk Committee should or not cover "   Risk Committees tend to deal more with operational aspects than strategic ones, not leveraging enough risk as a key element in decision- making Intr "   Risk governance is definitely in place within the group surveyed but there is not much homogeneity in the way it is set up, nor what it stands for "   After having been defined, risk governance has to be effectively deployed to deliver full value Sep •  slide © Risk Dynamics - Confidential ICMIF Biennal Conference - Risk Management Matirity Assessment Survey 26/10/2011 8 •  Com
    • Risk Management Framework (1) Alw lette sub Introduction verb "   A risk management framework is used to Higrity ●  Ensure a risk vision well aligned with corporate objectives ●  Embed risk into strategy, planning and decision making (e.g. budgeting process, allocation of scarce resources based on risk / return profile) ●  Better manage capital vis-à-vis risk and ensure the long term viability of the overall institution Intr ●  Harmonise risk practices across the organisation through a consistent Risk Management Framework ●  Institutionalise the way risk culture is fostered internally ●  When applicable, empower local entities by improving accountability and delegation schemes, in line with local specificities and maturity level Sep •  slide © Risk Dynamics - Confidential ICMIF Biennal Conference - Risk Management Matirity Assessment Survey 26/10/2011 9 •  Com
    • Risk Management Framework (2) Alw lette sub Sample of Risk Management Framework verb Higrity Intr Sep •  slide © Risk Dynamics - Confidential ICMIF Biennal Conference - Risk Management Matirity Assessment Survey 26/10/2011 10 •  Com
    • Risk Management Framework (3) Alw lette sub Findings verb "   A majority of the respondents assert that they have either a strong or Higrity very strong framework "   Of those asserting that they have a strong or very strong risk management framework, 43% have a premium income inferior to $250 million Intr "   Moreover, a third of the institutions with a weak management framework have a premium income greater than $500 million Sep •  slide © Risk Dynamics - Confidential ICMIF Biennal Conference - Risk Management Matirity Assessment Survey 26/10/2011 11 •  Com
    • Risk Management Framework (4) Alw lette sub Outlook verb "   Risk management frameworks are, in most institutions, still in their Higrity infancy "   A strong challenge is the deployment of such frameworks across the institutions, taking into consideration the proportionality principle Intr "   This deployment aims at integrating the risk dimensions as early as possible in business processes and product lifecycles "   Its success highly depends on an appropriate communication strategy including targeted training and change management programs Sep •  slide © Risk Dynamics - Confidential ICMIF Biennal Conference - Risk Management Matirity Assessment Survey 26/10/2011 12 •  Com
    • Model (1) Alw lette sub Introduction verb "   Complex models are used in the modern financial sector to Higrity ●  aid business decision-making in a dynamic and constantly evolving environment ●  optimize the usage of scarce capital resources ●  report on capital needs "   They are also critical for risk-sensitive pricing, strategic planning and Intr optimized balance sheet management "   They follow a specific lifecycle "   Portfolio of models are usually managed through a specific governance framework to improve objectivity, consistency, control and transparency Sep •  slide © Risk Dynamics - Confidential ICMIF Biennal Conference - Risk Management Matirity Assessment Survey 26/10/2011 13 •  Com
    • Model (2) Alw lette sub Sample of Model Lifecycle verb Higrity Intr Sep •  slide © Risk Dynamics - Confidential ICMIF Biennal Conference - Risk Management Matirity Assessment Survey 26/10/2011 14 •  Com
    • Model (3) Alw lette sub SCR Reporting verb "   On the front of solvency capital requirement reporting, only 30% of the Higrity respondents use a partial or full internal model Intr "   Two third of the institutions reporting their SCR with an internal model have a premium income above $500 million "   There is no European respondent within the population surveyed with Sep a full internal model "   Among the institutions benefitting from a partial internal model, only half come from European countries, Asian mutuals leading the pack •  slide © Risk Dynamics - Confidential ICMIF Biennal Conference - Risk Management Matirity Assessment Survey 26/10/2011 15 •  Com
    • Model (4) Alw lette sub Risks Covered by Models verb "   All respondents equipped with a partial or full internal model use it to Higrity monitor underwriting risk with an almost identical result on the market risk and credit risk fronts "   Half of this population uses its quantitative capabilities to monitor operational risk Intr "   Quantification of reputational risk and strategic risk are also starting to build up Sep •  slide © Risk Dynamics - Confidential ICMIF Biennal Conference - Risk Management Matirity Assessment Survey 26/10/2011 16 •  Com
    • Model (5) Alw lette sub Outlook verb "   Models tend to remain the privilege of larger institutions which benefit Higrity from more data, expertise and financial means to address a growing diversity of risks "   Nonetheless, more types of risks are positively being quantified by institutions regardless of their size or location Intr Sep •  slide © Risk Dynamics - Confidential ICMIF Biennal Conference - Risk Management Matirity Assessment Survey 26/10/2011 17 •  Com
    • Risk Appetite / Risk Limits (1) Alw lette sub Introduction verb "   Risk appetite is the amount and type of risk that a company is able and Higrity willing to accept in pursuit of its strategic objectives of value creation "   Establishing transparent tolerances for risk helps promoting throughout the organization ●  a risk-return culture, by management of relative value creation per business line Intr ●  a risk portfolio management culture, by pro-active risk management across and within business lines and risk types "   Because of its enterprise-wide perspective, its connection with business strategy and performance expectations, establishing risk appetite is a major step towards the implementation of modern enterprise risk management Sep "   Its formalisation is usually achieved through the definition of an overall risk appetite framework and a specific lifecycle •  slide © Risk Dynamics - Confidential ICMIF Biennal Conference - Risk Management Matirity Assessment Survey 26/10/2011 18 •  Com
    • Risk Appetite / Risk Limits (2) Alw lette sub Risk Appetite Key Building Blocks verb Higrity Intr Sep •  slide © Risk Dynamics - Confidential ICMIF Biennal Conference - Risk Management Matirity Assessment Survey 26/10/2011 19 •  Com
    • Risk Appetite / Risk Limits (3) Alw lette sub Expressing Risk Appetite verb "   Properly defining risk appetite is becoming a best practice, even more so Higrity as it is not anymore expressed solely through qualitative statements "   Almost two thirds of respondents say they express their risk appetite both from a quantitative and qualitative viewpoints Intr "   More than a third of respondents either do not have set their risk appetite or do it solely from a quantitative or qualitative viewpoints "   Four companies with a premium income greater than $1 billion still do not formally express their risk appetite today Sep •  slide © Risk Dynamics - Confidential ICMIF Biennal Conference - Risk Management Matirity Assessment Survey 26/10/2011 20 •  Com
    • Risk Appetite / Risk Limits (4) Alw lette sub Risk Limits Monitoring verb "   Only one third of the respondents monitor their risk limits both per risk Higrity type and through specific Key Performance Indicators (KPIs) "   10 companies with premium income superior to $500 million (44%) do not monitor through KPIs Intr Sep •  slide © Risk Dynamics - Confidential ICMIF Biennal Conference - Risk Management Matirity Assessment Survey 26/10/2011 21 •  Com
    • Risk Appetite / Risk Limits (5) Alw lette sub Outlook verb " Mutuals are understanding the potential benefits of proactive risk Higrity appetite management "   Almost all respondents with a defined risk appetite indicate that it impacts their entire organization at group and business unit levels Intr Sep •  slide © Risk Dynamics - Confidential ICMIF Biennal Conference - Risk Management Matirity Assessment Survey 26/10/2011 22 •  Com
    • Stress Testing (1) Alw lette sub Introduction verb "   Scenarios and stress tests are considered to have two major aims Higrity ●  As a regulatory requirement, they are performed upon specific request from the local regulator or a regional authority on a regular basis ●  An institution’s senior management can put them to use as a supporting tool to develop an integrated business strategy and make proper risk management and capital planning decisions Intr "   In that context, they can be applied to ●  Shape the risk profile and ambition of the firm ●  Support a forward-looking assessment of risk ●  Contribute to the evaluation of adverse events impact ●  Define ex ante plans to prevent and/or mitigate the impact of potentially very adverse events ●  Trigger discussions and highlighting issues crossing the boundaries of business lines Sep and/or internal responsibilities •  slide © Risk Dynamics - Confidential ICMIF Biennal Conference - Risk Management Matirity Assessment Survey 26/10/2011 23 •  Com
    • Stress Testing (2) Alw lette sub Sample of Stress Testing Process verb Higrity Intr Sep •  slide © Risk Dynamics - Confidential ICMIF Biennal Conference - Risk Management Matirity Assessment Survey 26/10/2011 24 •  Com
    • Stress Testing (3) Alw lette sub Diversity of Stress Test Methods verb "   As much as three quarters of respondents assert that they do apply Higrity stress tests within their organization "   Only 20% of respondents base their stress testing framework on three types of stress tests Intr "   Among the quarter with no stress tests, 75% have a premium income lower than $500 million Sep •  slide © Risk Dynamics - Confidential ICMIF Biennal Conference - Risk Management Matirity Assessment Survey 26/10/2011 25 •  Com
    • Stress Testing (4) Alw lette sub Types of Stress Testing Methods Used verb "   In terms of the types of stress tests most commonly used, the simple Higrity ones logically come first and the most complex, last "   Among the 16 institutions asserting that they have no stress-testing in place, 75% have a premium income inferior to 500 $mil and up to three have a premium income above the $1000 million mark Intr Sep •  slide © Risk Dynamics - Confidential ICMIF Biennal Conference - Risk Management Matirity Assessment Survey 26/10/2011 26 •  Com
    • Stress Testing (5) Alw lette sub Outlook verb "   The involvement of the senior management is essential for the effective Higrity operation of stress testing "   Institutions that used the results of stress tests as an input into strategic decision seem to have been less affected by the financial crisis Intr "   According to the principle of proportionality, smaller institutions can rely on more expert-based techniques to take full advantage of stress testing Sep •  slide © Risk Dynamics - Confidential ICMIF Biennal Conference - Risk Management Matirity Assessment Survey 26/10/2011 27 •  Com
    • Alw lette Global Outlook (1) sub verb "   54% of the surveyed institutions experiencing an increasing regulatory Higrity pressure are non-European Intr "   Risk is today on the agenda of all institutions "   This situation and the current economic conditions are likely to motivate all ICMIF members to make risk management a key priority for 2012 and Sep beyond "   But considering compliance as the sole driver of change would clearly be a mistake •  slide © Risk Dynamics - Confidential ICMIF Biennal Conference - Risk Management Matirity Assessment Survey 26/10/2011 28 •  Com
    • Alw lette Global Outlook (2) sub verb "   Any financial institution, including mutuals, need to manage risk in linerity with a set risk appetite, by balancing its risk capacity with its risk profile Hig "   This survey demonstrates that a vision is lacking as to what needs to be done Intr "   Building blocks already exist and could be leveraged "   The challenge is for the top management to understand not only the benefits of properly managing risk appetite, but what this management also entails, among others ●  strong risk governance, capable of influencing the risk culture of the institution, and positioning the risk function as a key strategic business partner providing independent advice Sep ●  tools to ensure a robust and sustainable SCR computation, as well as a proper embedding of risk measures within strategic decision making ●  stress tests to contribute to budget planning and further improve risk management practice ●  comprehensive risk dashboards •  slide © Risk Dynamics - Confidential ICMIF Biennal Conference - Risk Management Matirity Assessment Survey 26/10/2011 29 •  Com
    • Alw lette Global Outlook (3) sub verb "   In order to support the top management in establishing a proper strategy Higrity for the future, and as a new supporting member of ICMIF specializing on risk management issues, we pledge to work with you over the coming years to further establish and maintain benchmarks specific to the ICMIF membership Intr "   This will be achieved by taking into account market best practice and regulations as to comfort your vision of where you stand, hence supporting the development of your own vision of where you want to be Sep •  slide © Risk Dynamics - Confidential ICMIF Biennal Conference - Risk Management Matirity Assessment Survey 26/10/2011 30 •  Com
    • Alw lette Contact sub verb "   To receive this presentation or for further information about Risk Dynamics:rity Dr Dominique Bourrat Hig Mobile: +32 496 882 468 Tel: +32 2 340 0090 Fax: +32 2 340 0091 email: dbourrat@riskdynamics.eu Intr "   More information about Risk Dynamics can also be found at the following address: http://www.riskdynamics.eu Sep •  slide © Risk Dynamics - Confidential ICMIF Biennal Conference - Risk Management Matirity Assessment Survey 26/10/2011 31 •  Com