Risk Management as a Value Enabler - Welcome to the ... · Risk Management as a Value Enabler ... So where are we today in terms of Enterprise Risk Management (ERM) development? Past

Risk Management as a

Value Enabler

Eamon McGinnity & Kailash Mittal

3 December 2015

1© 2015 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

Agenda

The Development of Risk Management

How can ERM add value?

Aspects of the Risk Framework can be developed to add more value

Examples of how improvements in Risk MI can add value

How we can reflect Risk Value and some concluding comments


The regulatory environment is more intrusive and coordinated, driving convergence

of risk management practices

Basel Committee on

Banking Supervision

Raising the bar globally e.g.. risk appetite and tolerances and stress

and scenario testing


The regulatory pressures on Insurers isn’t reducing!

1 2 3 4 5

Key

Low Regulatory

Pressure

High Regulatory

Pressure

APAC

2016

EMEA

2016

North America

2016

2016

LATAM


Risk Events have influenced approach and expectations of risk management

Taking on too much risk Lack of control / risk culture?

Not transparently communicating risk Concentration risk


The risk transformation journey for insurers

So where are we today in terms of Enterprise Risk Management (ERM) development?

Past Recent Future

Effort and complexity

Ad

de

d v

alu

e

Further development and

embedding – strategic

influence? How

embedded?

Development of risk

management, raised

awareness, quick wins

on control and setting up

3 Lines of Defence

Ongoing development

driven to meet regulatory

expectations


The evolution of ERM

As we move through that the maturity spectrum we can see some key changes

Tactically focused

Controls led

Focused on detail and processes

Generalist

Operational Risk/Compliance heavy

Historical bias

Analysis heavy

Strategic focus

Value driven

Thought leadership

Specialist

Greater Financial/Insurance Risk Focus

Forward looking bias

Action focused

Old World risk management New World ERM

Blurred accountabilities between

First/Second/Third LODClear second LOD accountability


The case for further investment in risk management as an activity

Linkage to

financial

outcomes

The Pace of

Change

Ratings

Agencies

Regulatory

interests

Customers

How can ERM add Value?


Different Interpretations of Value

Part of the problem is - differing perceptions of what ‘value’ is...

…Need to develop a means of consistently articulating what the value of Risk Management is?

Value

Return

Usefulness

Us

efu

lne

ss

Us

efu

lne

ss

MaterialMaterial

Mate

rial

Quality

Quality

Insightful

Insightful

Insightful

Helpful

Helpful

Helpful

Merit

Merit

Merit

Material

Consequence

Cost

Co

st

Cost

Helpful

Challenge

Ch

all

en

ge

Eff

icie

nc

y

StrategicCostStrategic

Helpful

Qu

ali

ty

Insightful

Eff

icie

nc

y


Where Risk functions can add Value

■ Risk are in a unique position; can lessons learnt be shared across the

business to improve the risk culture

■ Risk can assess and highlight control optimisation opportunitiesRisk efficiencies

■ Reducing volatility in risk and capital profile

■ Helping the business manage risk concentrations; diversification is

amongst the most valuable tools that Risk can supportCapital optimisation

■ Risk functions should be applying commercial as well as risk expertise;

challenging the business where it is being too cautious

■ The CRO should have input to strategic planning whilst maintaining

independence

Revenue identification


Our Viewpoint – Getting value from Risk Management as an activity

The business

owning Risk

Management day

to day

The Second Line

Risk Function

comprises small

team of risk

experts who offer

challenge that is

impactful and

based on

commercial

knowledge

Efficient Risk

Management

Processes/Tools

have been

developed to

benefit the

business

The value of Risk

Management can

be articulated in

terms the

business

understands such

as Key

Performance

Indicators

Risk

Management

activities are

focussed onto the

most material

aspects of the

risk framework

with real

analytical insight

driving outcomes

Ownership Agile Lean Measureable Insight

Value is optimised when there is a consistent focus on Risk Management activity across all three

Lines of Defence. This is characterised by:

Which aspects of the Risk

Framework can be developed

to add more value


Value add will differ by audience however efficiencies can improve…

Complexity

Va

lue

Bo

ard

Mid

Mg

rO

pera

tio

ns

Diversification

Capital Allocation

Risk MI & Analysis

Risk Appetite

Control Framework

Stress Testing

Risk Processes

Product Risk Assessments

Loss Monitoring

Risk Assurance

Risk Training

Key: Fundamental Applied Risk team’s capacity End state post efficiency improvement


Traditional risk map

An area where more value could be added is in the risk profile…

Likelihood of OccurrenceLow High

High

Po

ten

tia

l Im

pa

ct


Speed viewInter-connected view

But risks are inter-connected and will emerge at different speeds…

SpeedShort term Long term

High

Inte

rco

nn

ecti

ng

Low

How improvements in Risk MI

can add value


Risk MI Design Principles define what good looks like

Data is consistent and timely

Efficiently produced, updated and

distributed

RISK PROFILE

GROUP RISK APPETITE

SOLVENCY CAPITAL ADEQUACY

Contains a clear point of view

Communicates key issues in enough

detail to ensure use in decision making

Forward looking and a mixture of visual

messaging and analysis


Example 1 - Risk MI was enhanced to enable stronger oversight of key exposure at a

subsidiary

Q2 14

Q1 15 Q3 15

Q1 14 New CRO determined the

need to improve and explore

options to enhance oversight

of financial risk at a major

subsidiary.

Quick wins incorporated into

risk reporting:

■ Measurement of

performance against key

indices.

■ Analysis of performance

at a fund level.

■ Analysis of derivative use. Further analysis included regarding

derivatives

Clear incorporation of

exposures against new (more

extensive) risk tolerances

were added with those being

piloted included for six

months.

Inclusion of more forward looking

analysis:

■ Emerging Risk analysis.

■ Qualitative assessment of risk

category (for current period more

than six months).

Q3 14


An extract of the changes that Group made to their Risk MI

P&L Impact following instantaneous Equity Shock

Fund performance (extract)

Portfolio Asset Mix %

Month on Month

change

Monthly performance

versus FTSE benchmark YTD performance

YTD Performance vs.

FTSE benchmark

Alternative Strategy Funds 5.9% (0.94)% (0.04)% 3.47% (0.62)%

Balanced Funds 6.3% (0.82)% (0.04)% 7.75% (0.36)%

Bond based funds 18.2% (0.88)% (0.11)% 3.55% (1.93)%

Emerging Markets Funds 8% (5.50)% (0.17)% (2.63)% (0.60)%

Global Funds 3.2% (1.99)% (0.06)% 1.28% (0.42)%

Large Cap Funds 19.9% (0.70)% (0.09)% 11.56% (0.39)%

Mid Cap Funds 7.0% 0.49% 0.05% 11.83% (0.14)%

Sector Funds 4.4% (0.35)% 0.00% 10.90% (0.11)%

(3,000)

(2,000)

(1,000)

0

1,000

2,000

3,000

(50)% (45)% (40)% (35)% (30)% (25)% (20)% (15)% (10)% (5)% 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%

£, m

illio

n

FTSE 350

Assets alloacted to Product A Entire Portfolio


Example 2 – Better monitoring of customer outcomes driven by regulatory change

Set up Conduct

Committee to

oversee the

management of

Conduct Risk.

The company was required to migrate from the

compliance-focussed TCF principles to the

forward looking retail conduct risk approach.

2016

H1 14

H2 14

H1 15

Agreement of desired high

level outcomes for the

business and redesign of

underlying processes to

achieve those outcomes.

Redesigning of metrics for

the assessment of

customer outcomes.


The focus changed from one of compliance to prediction

Treating customers fairly outcomes

Outcome

1

The fair treatment of customers is

central to the corporate culture.

Outcome

2

Products and services meet the

needs of identified consumer groups

and are targeted accordingly.

Outcome

3

Consumers are provided with clear

information and are kept

appropriately informed

Outcome

4

Where consumers receive advice,

the advice is suitable and takes

account of their circumstances.

Outcome

5

Consumers are provided with

products that perform as firms have

led them to expect

Outcome

6

Consumers do not face

unreasonable post-sale barriers

imposed by firms

Customer Outcomes incorporating future outlook

Minimum

Standard

RAG status by data month

RAG

Sep Trend Outlook

RTT

return to

tolerance KPI RAG SpreadApr May Jun Jul Aug

Overall

Company ● ● ● ● ● ● ●Dec

2015

Product

Marketing ● ● ● ● ● ● ●Product

Lifecycle

Management● ● ● ● ● ● ●

Sales and

Advice ● ● ● ● ● ● ●

Post Sales ● ● ● ● ● ● ●Claims

Handling ● ● ● ● ● ● ●Dec

2015

Complaint

Handling ● ● ● ● ● ● ●

2 7 120

1 3 14

1 25

14

15

2 16

1 10

How we can reflect Risk Value

and some concluding

comments


A framework for articulating Risk’s value through the Risk Value equation

Increased return

Cost savings from

risk mitigation

Cost of risk

(operation)

Revenue

enhancements from

risk insights

Reduced cost of

risk capital

Risk value equationKey business drivers

Increase growth

Increase profitability

Increase return of

capital

Reduce cost

Build regulatory

relationship

Investor demands

Risk management levers

Risk TOM and

framework

Governanceand people

Reporting mechanisms

Risk related

processes

Risk systems

and technology

Enhancing

Risk

Management

levers


Examples of using the Risk Management Levers to Increase Return

Risk value equation

Cost savings from

risk mitigation

Cost of risk

(operation)

Revenue enhancements

from risk insights

Reduced cost of

risk capital

Increased return

Contribution to various KPIs

■ Extension of ICF to Outsourcing Providers.

■ 1LoD incentivised around to loss prevention.

■ Improved analytics to identify areas where capital can be

deployed more effectively.

■ Risk Management function integrated into business planning

process with remit to look at upside of risk.

■ Optimise fit for purpose risk models to produce diversification

and capital optimisation analysis to inform key business

decisions and capital management techniques.

■ Streamline 2LoD risk activities to focus on challenge and

oversight Rationalise controls performed in each product line

Po

sit

ive

co

ntr

ibu

tio

n

to k

ey K

PIs

Market Consistent

Embedded value (MCEV)

IFRS Profit

Solvency (Solvency / EC

etc.)

RAROC

Note: (a) Life examples.

Key performance

indicators (KPIs) (a)


Final Thoughts

As we move away from compliance focussed change, Risk

functions need to be able to articulate their value1

Risk tools need to keep pace with innovation and reflect the needs

of differing audiences2

Having gained a seat at the table, Risk have to bring a strategic

view and commerciality along with their independent risk expertise3


Thank you

Eamon McGinnity

Financial Risk Management, UK

T: +44 (0)20 7896 4974

M: +44 (0)7825 960524

E: [email protected]

Kailash Mittal

Director & Actuarial Practice Leader

T: +91 22 3091 3364

M: +91 98198 66790

E: [email protected]

mailto:[email protected]

mailto:[email protected]

The information contained herein is of a general nature and is not intended to

address the circumstances of any particular individual or entity. Although we

endeavour to provide accurate and timely information, there can be no guarantee

that such information is accurate as of the date it is received or that it will continue

to be accurate in the future. No one should act on such information without

appropriate professional advice after a thorough examination of the

particular situation.

© 2015 KPMG LLP, a UK limited liability partnership and a member firm of the

KPMG network of independent member firms affiliated with KPMG International

Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

The KPMG name, logo and “cutting through complexity” are registered trademarks

or trademarks of KPMG International Cooperative (KPMG International).

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Documents

Risk Management as a Value Enabler - Welcome to the ... · Risk Management as a Value Enabler ... So where are we today in terms of Enterprise Risk Management (ERM) development? Past