Risk Identification in Practice

Solange Berstein Chair IOPS Technical CommitteeSuperintendentPension SupervisorChile

Agenda1. Risk Focus2. Risk Factors

I. IndividualII. Systemic

3. Risk IndicatorsI. QuantitativeII. Qualitative

4. Global Scoring

Risk FocusSupervisory Objectives

• In the case of Chile the Superintendence of Pensions is not only responsible for monitoring the whole pension system (public and private pillars)

• The main focus is Fiduciary responsibility of providers which leads to Consumer Protection: is the main concern, but also solvency is overseen.

• The focus of the authority is on processes, risk management and ‐governance rather than outcomes, but there are systems in place that provide of performance information.

• Given the system in Chile operates via commercial providers, supervisory oversight has to focus on conflicts of interest – ensuring that those with a fiduciary duty are managing the funds as well as an individual would themselves.

• As there are a limited number of providers (6), the focus of the SP is to identify risk areas within funds.

Risk Factors: Individual

Risk Factors: IndividualElements considered in the assessment• Supervisory guidelines: Best practices• Supervisors knowledge and expertise• Documentation provided by the entity• IT systems that collect data• Sanctions history• Information from customers complaints• Findings from previous inspections or other areas• Whistle blowing

• Some risks that affect the industry as a whole. There are different sources of information, such as:• Central Bank macroeconomic reports which are discussed

with all financial supervisors on a monthly basis, and in the cases of special situations this becomes as often as necessary;

• Information provided by other financial supervisors which are part of a committee that meets on a monthly basis;

• Signals of other macroeconomic or sector analysts; • Trends identified from customer complaints.

• These systemic risks are considered in the assessment at a final stage by affecting the overall rating of all or some of the supervised entities.

• Some times it might imply changes in regulation.

Risk Factors: Systemic

Risk Indicators: Quantitative• Currently there is a minimum return guarantee with respect

to the average return of the industry. Returns are computed on a daily basis and it is checked if pension funds comply.

• The probability of each pension fund hitting the minimum return is also computed to prevent non compliance.‐

• The authority is investigating other quantitative measures for DC risk, because the current mechanism makes administrators focus on short term returns. Moreover, as it is a relative measure, it does not limit absolute risk, which is restricted by investment limits, which are also checked on a daily basis.

Risk Indicator: QuatitativePension Risk

0

2

4

6

8

10

12

14

16

18

25 30 35 40 45 50 55 60 65 70 75 80 85

Va

lore

s e

n U

F

Perfil de ingreso

Perfil de contribución

Omisión sin APS

Omisión con APS

Ingreso Promedio Esperado 3 ultimos años

Income Profile

Contribution Profile

Average Income Last 3 yearsWithout Subsidy

With Subsidy

• The different risk areas are assessed for each institution by gathering information from different sources

• Compared against best practices in order to judge if the company is in adequate position.

• For a qualitative indicator for each risk area the supervisor evaluates the inherent risk and assess the existence of policies that mitigate these risks

• The way in which these policies are implemented and monitored in practice is also assessed.

Risk Indicators: Qualitative

Risk Indicator: QualitativeRisk Matrix by Entity• Each risk factor is ranked from 1 to 6 considering the policies that are set by

the company and the way in which these policies are implemented and monitored.

• Depending of the degree in which policies are developed and how these policies are in practice, the scoringis defined. Each score has associated a qualitative concept: 1= Solid, 2= Healthy, 3= Adequate, 4=Vulnerable, 5= Weak, 6= Extremely weak or no information.

• These risks are weighted according to the impact they have on members.• Significance Weights – measuring inherent risk – are ranked as follows:

• A: Critical• B: Very Important• C: Important

• The Risk matrix is filled with the scores and weights for each risk factor.

Global Scoring• A global scoring is assigned to every supervised entity taking into

consideration the inherent risk of each area, sub area within the entity and ‐the quality of controls for each inherent risk

• The global scoring combines the significance weights and the assessment of control quality.

• The global scoring takes values between 1 (lowest net risk) and 5 (highest net risk).

• The risk matrix looks at the risk level, quality of controls, global scoring and change in evaluation over time.

• SP Global Scoring by Entity

Risk Identification in Practice

Solange Berstein Chair IOPS Technical CommitteeSuperintendentPension SupervisorChile