Monday, 11 June 2012

Risk Appetite benchmarking study - Grant Thornton

Very neat release from Grant Thornton this week, trying to capture some of the juicy Risk Appetite space which corporate governance codes and indeed Solvency II is making particularly profitable.

The sample is reported on their website to be 43 CEO/Director-types from the London Market, hence the content isn't quite as picture perfect as a conventional life insurer may want, but the findings are very important for anyone who is in the thick of Risk Appetite Framework construction, refresh or replacement as we speak (which must be the majority of you, surely!).

Both ORSA and a general interest in understanding what one's neighbours were doing in the area of Risk Appetite Frameworks and Statements seems to have been the driver to participate, although strangely the corporate governance angle (whether it be UK code or indeed non-Solvency II EU activity) wasn't mentioned.

Elsewhere of note, I spotted;
  • Average 12-18 months to get a Risk Appetite Framework (RAF) signed off - from a standing start, that seems fair, bearing in mind the educational aspect is one which, from my experience, is massively constrained by pre-existing committee agendas which simply cannot (or perhaps will not) yield some additional time for coaching.
  • Wonderful split in perceptions between actuarial-led and risk-led RAFs. The actuaries are perceived to lend more weight to insurance and investment risk, use more quant in their synthesis, and as a result deploy the frameworks more effectively. The risk profession came off worse in this head-to-head, with a stringer focus on qualitative elements and operational risk. The actuarial approach was also observed to exert "more discipline, and in general demonstrated greater progress". Never mind, we'll win the war!
  • Instances where Risk Appetite Statements have been flexed in order to accomodate business cases which have been successfully presented to the Board. I seem to remember flexed limits (off the back of successful lobbying/inept challenging) causing Lehmans a problem or two a few years back...
  • Approaching the setting of limits in the Risk Appetite Statements from bottom up, using business plan content, appears to have been more successful than cascading down. Some debate about whether the tail should wag the dog here is also included.
  • Approach to Credit and Operational Risk was observed to be application of fixed limits for losses, as these are seen to be necessary evils in order to be in business.
  • Use of previous years results in setting some limits/tolerance levels seems to be common practice - not sure how that tallies with top-down/bottom-up approaches to rolling a framework out, but one might expect to see some element of projections in this activity.
  • Sadly, insurers were observed to be afraid to fall behind or indeed trailblaze on the matter due to fears of additional regulatory scrutiny. I truly hope that is a misplaced fear, and not a by-product of the zealousness of the pre-Solvency II regulatory interface.
Thanks GT, looking forward to the next one, but with a wider sample and a few more stats ideally.

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