Risk Appetite (specifically how best to communicate and document it) is particularly prominent with new obligations under the corporate governance code kicking in throughout this year, and the Society's ERM committee hauled in one of the CBIs top men to talk through options, with another couple of private sector big hitters. I spotted in particular;
- Risk Appetite Statement cannot be vague, and should include some financials
- Traffic Light system of monitoring was viewed favourably (amber being a warning sign to act)
- Breach alerts best in real time
- Solvency I and Solvency II measures matter - so don't rush for future state
- Very sketchy response on how to quantify "material" breaches of appetite, with no response documented from the regulator in this letter
- CBI want to know about "misses and near misses" - not quite sure about what the difference is frankly - are we now tiering 'misses' into categories? RAG's and traffic lights?
- No firm guidance on quantifying appetite for Op Risk
- Willingness (from the floor I imagine) for CBI to use standard definitions for risk appetite/tolerance/preference - amen to that brothers!
- Risk Appetite Statements should not be purely downside based
Some other very cute stuff included on Internal Model progress (a massive 45 models in the IMAP process - good luck staffing that!). On a serious note, one suggestion from the CBI was for 'independent validation' engagement documents to be submitted to the regulator to ensure they pass muster, which suggests there is a hot market for this type of service.
Two other parts of this jumped out. A sharp piece on diversification, where the CBI acknowledge that heavy use of expert judgement is anticipated, and point towards senior management understanding and ensuring the statistical quality standards can be met as aspects to consider.
The second linked piece was whether, as Insurance is a "mathematical business", that it is "not too much to expect" that the board and senior management to understand copulas and variance-covariance matrices.
You can tell that to the ex-politician NEDs first buddy...