NAPF Risky business seminar DWG 11092015
Published on: Mar 3, 2016
Transcripts - NAPF Risky business seminar DWG 11092015
An external perspective on risk
What I will cover
• A gallop through a life insurance company’s approach to Risk
• Some perceived differences between insurers and Pension Schemes
• Personal experiences and some suggestions
• Three key messages
Overview of insurance company risk issues - Solvency
• Must be able to demonstrate regulatory solvency at any time
• For some companies this meant daily during recent crashes
• Liabilities have guarantees (with-profits, GAOs, annuities)
• Alternative balance sheet methodologies used to reflect differing regulations
• In addition Board needs to define its own Risk Appetite
• Typically at least 99.5% chance of demonstrating solvency in 12m time
• Alternative approach based on probability of meeting liabilities as they run-off
• Needs to reflect ALL risks, not just those in regulations
• Regulations place personal responsibility on individuals
• Approved persons, SMIR, Solvency 2
Overview of insurance company risk issues – other aspects
• Other key financial metrics for success, all subject to risk
• Share price, dividends, payouts to policyholders, new business volumes
• And non-financial metrics
• Customer satisfaction (TCF measures), reputation with regulator, staff issues
• Both for their direct importance and indirect impact on other metrics
• Potential conflicts in managing metrics
• Eg Hedging aspects of market risk can reduce balance sheet volatility, but likely to
reduce expected policyholder payouts
• Models used to understand impact of future events on these metrics
• Can be full-fat and long to run, but also skinny and quick
• “Dashboard ICA” for Board level discussions
• All significant work done based on stochastic modelling
Overview of insurance company risk issues - governance
• Consultants love the Three Lines of defence
• First line – operational activity, resulting in the risk exposure
• Second line – checks and controls on the first
• Third – independent verification of adequacy of arrangements
• Can be over-kill for smaller, simpler insurers
• Not mandated in Solvency 2, but it does require documentation of controls
• Role of the Risk Register, Heat Maps
• Needs to link to risk of failing to meet the defined corporate objectives
• Ideally fully integrated with the financial model of the company
• But risk events or losses do happen…..
Other aspects of insurance company risk management
• Risk reporting
• Getting the level of materiality right – don’t report the noise
• Action plans
• Needs strong leadership/training so that risk management is second nature,
not an overhead
Analysis of risk events
• Human Error
• Poor judgement
• Skills & expertise
• Bad design
• Poor execution
• Missing processes
• Upstream / downstream changes
• Data errors
• System outages
• Functionality limitations
• Bugs / defects
• Legal / Regulatory changes
• Industry / Market changes
• Catastrophes & disasters
• Press coverage
Identify potential items for investigation
Perceived differences between insurers and pension funds - 1
• An insurance company’s Board is (usually!) united in their objectives
– are all Pension Fund Trustees?
• Are there clearly articulated objectives?
• Do all Trustees (including Sponsors) have same Risk Appetite?
• Insurance executives recognise their responsibility for all aspects of
operations – do the Trustees?
• What Operational Risks are being borne?
• Is there full look-through in the investments to the underlying risk exposures?
• Administration, Fund management, Transaction costs, quality of advice?
• Is there full clarity over, eg, role of Master Trusts?
Perceived differences between insurers and pension funds - 2
• Can a Pension Scheme use an equivalent to the Three Lines of Defence?
• Who is making decisions? What is motivating them? What controls are in place?
• Insurers do not normally have concept of “sponsor”
• How is risk of sponsor change in behaviour monitored and measured?
• Default risk scores used by PPF for the purposes of the Levy are crude and
insufficient for true risk management
• Recent guidance from TPR might help
• Relevant for both DB but also DC
• But Pension Funds don’t have huge hurdle of Solvency 2 – keep it that way!
• Lack of understanding of UK arrangements elsewhere within Europe
Personal experiences and some suggestions - 1
• Don’t disregard the “horizon scanning” – black swans exist:
• Removal of compulsory annuitisation announced March 2014
• increased requests for transfers and higher liquidity risk issue for Schemes
• For DC schemes, need to revisit the investment strategy for “lifestyling” funds,
where will liability lay if current targeting an annuity is inappropriate…
• HMT consultation on tax relief of pension contributions Summer 2015
• Need to engage with HMT NOW to prevent issues
• Outsourcing merely changes your risks:
• Constant vigilance, need specialist resource to manage contracts
Personal experiences and some suggestions - 2
• Cyber-threats are real:
• Management time to resolve can be the biggest cost though!
• Recognise that some people are key:
• Keep close to the key person in your Sponsor
• Consultants can help, but in the end you should know what is right
• All insurers and all Pension Schemes are different
Three key messages
1. Align all your stakeholders’ financial and other objectives
2. Thoroughly understand the drivers to those objectives
3. It is not just about the investments and asset-liability matching