Risk Appetite – What the CEO and Board Should be Doing

25 Pages·2011·0.32 MB·English

NETWORKING
Risk Appetite – What the CEO and
Board should be doing
Ian Laughlin
APRA Member
25 July 2011
Today
• Recent History
• What is it?
• Whose is it?
• Articulation, Translation, Co-ordination
etc
• Consistency with Plans
’
• APRA s Requirements
• Assessment of RA Statements
• How Actuaries Can Help
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Bad luck?
Appetite Unclear?
Appetite > Capacity?
Risk > Appetite?
• Westpoint, ACR, MFS, City Pacific … • Bear Stearns, Lehman Bros …
• Opes Prime • Credit Agricole
• Tricom • Northern Rock, RBS, …
• Centro
• Irish Banks
• Allco
• Icelandic Banks
• Babcock and Brown
• AIG
• NAB (CDOs), ANZ (Opes), RAMS,
• MBIA
• AMI (NZ)
• UBS
• Fannie Mae, Freddie Mac
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Useful references
• Risk appetite - The strategic balancing act – Ernst & Young 2010
• Risk appetite – How hungry are you? – PWC
• What’s your risk appetite – Oliver Wyman 2008
• Understanding and articulating risk appetite – KPMG 2008
• Risk Appetite - Society of Actuaries Webinar 2011 – Kent Griffin
• Risk Appetite - Bennet and Cusick 2007
• Implementing Robust Risk Appetite Frameworks to Strengthen
Financial Institutions – Institute of International Finance June 2011
• Strengthening the board-management dialogue on risk and
strategy – Tapestry Networks 2010
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What is it?
Risk capacity: the amount and type of risk an organization is able
to support in pursuit of its business objectives.
Risk appetite: the amount and type of risk an organization is willing
to accept in pursuit of its business objectives.
Risk tolerance: the specific maximum risk that an organization is
willing to take regarding each relevant risk.
Risk target: the optimal level of risk that an organization wants to
take in pursuit of a specific business goal.
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Source: Risk appetite. The strategic balancing act. Ernst & Young 2010
Whose appetite is it anyway?
• Shareholders focus is usually here
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Whose appetite is it anyway?
• Shareholders focus is usually here
• Customers but needed here too
e.g.
– Lifeco Par Policy-holders
– Debenture-holders
– Depositors
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Articulation: Risk Appetite
“conservative”; “considerable appetite for new
“aggressively pursue ventures”
Qualitative opportunities ..” “we have a war chest for …”
“low appetite for risk except if “guaranteed”
directly related to core skills” “backed by first mortgages”
“we have no appetite for systematic “low risk”
operational risk” “speculative”
“not tolerate damage to reputation” “aggressive”
“less than a 10% chance of a loss each year”
“less than x% chance of a breach of PCR in next 2 years”
“maintain S&P rating of AA”
“no more than X% decline in embedded value with 95% prob.”
“a negative return once in about every 7 years”
Quantitative
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Articulation: Risk Tolerance
“return on economic capital of no less than x% over 3 years”
“system downtime no more than …”
“no more than xx complaints each year”;
“expenses not to exceed budget by more than xx%”
“fraud less than yy% of total claims”
“counterparty credit rating no less than B”
“we will not tolerate fraud or illegal activity by staff”
“we have no tolerance for discrimination”
“unit pricing rectification no more than $Y”
“individual claim exposure of no more than $X”
“credit losses of no more than $Z”
“VAR of no more than …”
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Translation
Appetite
Company
(Quant/Qual)
Bus. Unit Tolerance
Risk by Type (quant)
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