risk based supervision training grenada ta garfin sept 8 - 11,2014

7/24/2019 Risk Based Supervision Training Grenada TA GARFIN Sept 8 - 11,2014

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GRENADA AUTHORITY FOR THE REGULATION OFFINANCIAL INSTITUTIONS

GARFIN

TECHNICAL ASSISTANCE MISSION

GEORGETOWN, GRENADA

COURTNEY CHRISTIE-VEITCHFINANCIAL SECTOR SUPERVISOR, CARTAC

SEPTEMBER 8 - 11, 2014

Ris-!"s#$ S%'(isi)*


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Presentation Outline

Background

Significant Activities

Materiality

Inherent risks

Quality of Risk ManagementResidual Risk


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Presentation Outline

Direction of Risk

Caital Assessment

!arnings Assessment

"i#uidity Assessment

Comosite Rating


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Background$ Role of Prudential Suervision


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'he !ssence of Risk 'aking

Experience taught me a fewthings. One is to listen to your

gut, no matter how goodsomething sounds on paper.The second is that you'regenerally better off stickingwith what you know. And the

third is that sometimes yourbest inestments are the onesyou don't make() Donald'rum


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Rationale for Risk*+ased Aroach

Resources are not infinite , allocation of scarceresources

Mechanism to rioriti-e &ork,on*sites . focus

efforts on greatest risks/ocus on risks to institution0s aims and o+1ectives

Basis for 1ustifying aroach2 action and decision

Documented and consistent aroach to riskmanagement


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Risk Management Stages

Decisionto +e Risk*

+ased

Set RiskConte3t


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S"+i)'s 201. A**%"/ R#&)'

Ste 4$ Identifying Significant Activities

Our 'eam delivered net rofits of 56(7 +illion2

&hich is 89 a+ove :;4: and our fourteenth

consecutive year of rofit gro&th( Revenues &ere

5e rovided 54?(8? +illion of insurance and

annuity +enefits to our customers and their

families in :;47( In addition2 &e managed the

@!ASO and @PASO health +usiness on +ehalf of

the @overnment of amaica and the largest ool

of ension funds in amaica( 'hese are ma1or

+usinesses from &hich &e ay out another

almost 54; +illion annually( Our investment

funds outerformed their resective +enchmarks

for the most art and some &ere the +est

erformers in their asset class)(!eft" #r. The

$on. %.#. &illiams, hairman %ight" %ichard

O. (yles, )resident * EO


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Ste I$ Identifying Significant Activities

"ine of +usiness

Business units

!nterrise &ide rocess e(g( information technology

Activities can +e identified from$ Organi-ation structure

Strategic lans

Oerational and Business lans

Caital allocations2

/inancial reorting internal,e3ternal


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>hat are the lines of +usiness,+usinessunits in an insurance firmE

>hat are the lines of +usiness , +usinessunits in a credit unionE


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'yes of Insurance "ife insuranceF Gon*life insuranceF Reinsurance

!(g( Activities , "ines of Business , Business Hnits Insurance

Annuity

Hnder&riting

Claims

Investment

%ealth +usiness Pension /unds Management

Premium

Related Party 'ransactions


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!(g Activities , lines of +usiness , +usiness units ina credit unionE "oans

Investments

Cash and lacements

Deosits , share , savings

Related Party 'ransactions


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Ste II$ Determining Materiality

Assets generated +y the activity relative to total assetsi-e

Revenue generated +y activity in relation to total

revenueGet income +efore ta3,total net income +efore ta3

Risk &eighted assets generated +y activity , totalR>A

Caital allocation , total caital

Strategic imortance


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Ste III$ Assess Inherent Risks

Inherent risk is risk &hich cannot +esegregated from the activity( It is intrinsic toan activity and arises from e3osure to and

uncertainty from otential future events(Inherent risks are evaluated +y consideringthe degree of ro+a+ility and the otential

si-e of an adverse imact on an institutionscaital2 li#uidity or earnings(


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Inherent Risk Assessment


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Inherent Risk /rame&ork * 'raditional

Busi

ness(!

nviron

Oer

ating

(

!nviron


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Inherent Risk /rame&ork * Revised

Busi

ness(!

nviron

Oer

ating

(

!nviron


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Inherent Risk Rating


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Inherent Risk Rating


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Inherent Risk Rating * CAM!"S


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Inherent Risk Rating * CARAM!"S


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Asset Quality Assessment

Soundness of risk identification ractices2credit under&riting standards and creditadministration ractices Credit Risk

"evel2 distri+ution2 severity and trend ofro+lem2 classified2 non accrual2restructured2 delin#uent andnonerforming assets on and off +alancesheet Credit Risk


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Ade#uacy of allo&ances for loans andlease losses and other valuationreserves

Credit risks arising from or induced +yoff*+alance sheet transactions2 e(g(

unfunded commitments2 creditderivatives2 commercial and stand+yletters of credit and lines of credit(


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Diversification and #uality of the loanand investment

!3tent of securities under&ritingactivities and e3osures tocounterarties in trading activities

!3istence of asset concentration


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A+ility of management to roerlyadminister its assets2 including timelyidentification and collection of ro+lemassets

Ade#uacy of internal controls and

management information systemsJolume and nature of credit

documentation e3cetion(


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Prudent investment ortfolioE CR

Ade#uate sread of investments among asset tyesand counter arties CR

Investment olicy in lace to ensure ongoingrudency of investment ortfolio CR

Investment consistent &ith olicy CR

Investment administered in a rudent mannerOR

Mi3 of investment assets in line &ith deosit andinsurance fund re#uirements "RR


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Asset Quality Rating


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Asset Quality Rating


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Sensitivity to Market Risk Assessment

Sensitivity of earnings or the economicvalue of caital to adverse changes ininterest rate2 foreign e3change rates2

commodity rices or e#uity rices'he a+ility of management to identify2

measure2 monitor and control e3osure to

market risk given the si-e2 comle3ity andrisk rofile of the /I


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Sensitivity to Market Risk Assessment

'he nature and comle3ity of interest raterisk e3osure arising from non tradingositions

'he nature and comle3ity of market riske3osure arising from trading2 assetmanagement activities and foreign e3change

oerations


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Sensitivity to Market Risk Rating


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Reutational Risk Assessment

Cororate @overnance

Management integrity

Staff cometence , suortCororate culture

Risk management and controlenvironment


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Reutational Risk Assessment

/inancial Soundness , Business via+ility

Business ractices

Customer satisfaction"egal , regulatory comliance

Contagion risk , rumors

Crisis management

Disclosure and transarency


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Reutational Risk Rating


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Concentration Risk Assessment

C)*#*'"i)* 'is can arise from unevendistri+ution of e3osures or loan to its+orro&ers( Such a risk is called Game

Concentration risk( Another tye is SectoralConcentration risk &hich can arise fromuneven distri+ution of e3osures to

articular sectors2 regions2 industries orroducts(


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Concentration Risk Assessment

@eograhic concentration

Single name

Related arty

Balance sheet

Business , Product line


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Oerational Risk Assessment

O'"i)*"/ 'isis Kthe risk of achange in value caused +y the fact thatactual losses2 incurred for inade#uateor failed internal rocesses2 eole andsystems2 or from e3ternal eventsincluding legal risk2 differ from thee3ected lossesK( Basel Definition


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Oerational Risk Assessment

Internal /raud * misaroriation of assets2 ta3 evasion2 intentionalmismarking of ositions2 +ri+ery

!3ternal /raud* theft of information2 hacking damage2 third*arty theftand forgery

!mloyment Practices and >orklace Safety * discrimination2 &orkers

comensation2 emloyee health and safety

Clients2 Products2 L Business Practice* market maniulation2 antitrust2imroer trade2 roduct defects2 fiduciary +reaches2 account churning

Damage to Physical Assets * natural disasters2 terrorism2 vandalism

Business Disrution L Systems /ailures * utility disrutions2 soft&arefailures2 hard&are failures

!3ecution2 Delivery2 L Process Management * data entry errors2accounting errors2 failed mandatory reorting2 negligent loss of clientassets


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Strategic Risk Assessment

S'"#+i Ris is the risk of current orrosective imact on the financialinstitutions earnings2 caital2 reutation

or standing arising from change in theenvironment and from adverse strategicdecisions2 imroer imlementation of

decisions or lack of resonsiveness toindustry2 economic or technologicalchanges(


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/our ey !lements$

Strategic Planning

Alignment and change managementImlementation and monitoring

Performance evaluation and feed+ack


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Comati+ility or suita+ility of theinstitutions goals and o+1ectivesconsistent &ith * cororate vision2 values2

culture2 +usiness direction2 risk tolerance/inancial o+1ectives consistent &ith

strategic goals

Strategic decisions are rudent relative tosi-e and comle3ity


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Resonsiveness to changes inenvironment

Ade#uacy of resources in carrying outstrategic decisions

Imlementation of strategic decisions

Imact of strategic decisions


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Reinsurance Risk Assessment

/inancial soundness of insurers reinsurance comaniesCredit Risk

Ade#uacy of diversification of ceded remiums amongreinsurance comanies Credit Risk

Aroriateness of insurers reinsurance strategyHnder&riting,"ia+ility Risk

Ade#uacy of Insurers rotection against catastrohiceventsHnder&riting,"ia+ility Risk

Aroriateness of insurers reinsurance contractsOerational Risk

Aroriateness of the administration of reinsurancerelationshis +y the insurer Oerational Risk


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Actuarial "ia+ility Risk Assessment

Insurers lia+ility aroriatelyestimated and reorted

Product Design Risk

Are regulatory re#uirements +eing met+y Insurer regarding technical

rovisions "egal,Regulatory Risk

Self Dealing and Related Parties Risk


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Self Dealing and Related Parties RiskAssessment

Process in lace to revie& related artytransactions Oerational Risk

Related arties dealings in accordance&ith ethical standards Reutation Risk

>ritten code of ethics olicy in lace

for emloyees Reutation RiskSignificant related arty revenue2

e3enses2 assets or lia+ilitiesE


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Proosed Risk Assessment System . Inherent Risks


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@rou !3ercise N :

4( Hsing a scale of 4 . ? 4 Strong and ? CriticallyDeficient2 develo a risk scoring definition matri3 for thefollo&ing inherent risks$ @rou A

Strategic Risk

Oerational Risk Concentration Risk

:( :( Hsing a scale of 4 . ? 4 Strong and ? CriticallyDeficient2 develo a risk scoring definition matri3 for the

follo&ing inherent risks$ @rou B Reinsurance

Actuarial lia+ilities

Self dealing and related arties


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@rou !3ercise N 7

4(Identify the inherent risks in each of thesignificant activities and score on the scale of 4 . ?for each suervised entity credit unions and

insurance comanies(


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Quality of Risk Management and Oversight

Oerational ManagementComliance /unction

Internal Audit , Suervisory Committee /unction

!3ternal Audit /unctionRisk Management /unction

Senior Management

Board Oversight


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Quality of Risk Management Assessment

Oerational management Day to day management of significant activities

Ade#uate and aroriate for nature2 si-e and comle3ityof the financial institution

Sufficient and effective in managing and mitigating keyrisks

Policies

rocesses Control systems

Staff levels and e3erience


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Board Oversight Jary +ased on si-e2 structure and comle3ity of institutions

Institutions re#uired to have in lace an effective +oard ofdirectors and senior management

Board agree risk aetite e(g( aggressive or conservative Board of directors ultimately accounta+le for management and

oversight of the institution

Business lan in lace and aroriate . deosit,savings

gro&th or remium gro&th too aggressiveE Deending on si-e2 +oard may delegate some oversight

resonsi+ilities to +oard su+*committees e(g(( audit2 riskmanagement and human resource


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Senior Management OversightDeending on si-e2 senior management may

delegate some oversight resonsi+ilities to other

oversight functions$ Risk management

Suervisory Committee,Internal Audit

Comliance


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"evel and #uality of oversight andsuort of all institution activities +y the+oard of directors and management

'he a+ility of the +oard of directors andmanagement2 in their resective roles tolan for2 and resond to risks that may

arise from changing +usiness conditionsor the initiation of ne& activities orroducts


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Ade#uacy of2 and comliance &itharoriate internal olicies andcontrols addressing oerations andrisks of significant activities

Accuracy2 timeliness and effectiveness

of management information and riskmonitoring systems aroriate for the/Is si-e2 comle3ity and risk rofile(



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Quality of Risk Management AssessmentAudit and Internal Controls

Comliance &ith la&s and regulationsResonsiveness to recommendations

from auditors and suervisory authorities

Management deth and succession

!3tent that +oard of directors or

management is affected +y2 or susceti+leto2 dominant influence or concentrationof authority(



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Quality of Risk Management AssessmentAudit and Internal Controls

Reasona+leness of comensation olicies andavoidance of self dealing

Demonstrated &illingness to serve the legitimate

/I needs of the communityClaims aid +y insurer in a fair and timely

manner

Insurer comliant &ith market conductre#uirements

'he overall erformance of the institution and itsrisk rofile

l f k


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Quality of Risk Management Rating

li f i k i


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Quality of Risk Management Rating


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Residual Risk Assessment

%o& key risks are managed in eachsignificant activity . oerational management

!ffectiveness of oversight functions @overnance , Board Internal audit , Internal controls

Comliance

!ach key inherent risk is consideredsearately for each significant activity

Determine aggregate residual risk


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Residual Risk Rating


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Residual Risk Rating


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Residual Risk Assessment


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Direction of Risk

Sta+le

Risk Imact


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Caital Ade#uacy Assessment

"evel and #uality of caitalOverall financial condition

Managements a+ility to addressemerging caital needs

Gature2 trend and volume of ro+lem

assets and ade#uacy of rovision forloans and investment losses andade#uacy of other reserves

Risk Imact


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Sufficient caital relative to lia+ilitiesand volumes of +usiness

Aroriateness of tye of caital

In comliance &ith share caital2solvency margin2 deosit and fund

re#uirements as set out in la& and regs(

Risk Imact


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Off +alance risk e3osures@ro&th rosects and ast e3eriences

in managing gro&th

Balance sheet comosition2 natureamount of intangi+le assets2

concentration risks2 market risks2 risksin non traditional activities

Access to caital


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Caital Ade#uacy Rating


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Caital Ade#uacy Rating

Risk Imact


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!arnings Risk Assessment

"evels of earnings including trends and sta+ility ,#uality of earnings sources

!arnings track record to augment caital

A+ility to rovide for ade#uate caital throughretained earnings

Go reatriation of rofits , ayments of dividends+efore full comliance &ith Acts(

"evel of e3enses in relation to oerations

Hnder&riting revenues relative to incurred claimsroduct design and under&riting risks

Risk Imact


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!arnings Risk Assessment

Ade#uacy of the +udgeting systems2forecasting rocesses2 managementinformation systems

Ade#uacy of rovisions to maintain theallo&ance for loan and lease losses andother valuation allo&ance

'he earnings e3osure to market risk2such as interest rate2 foreign e3change andrice risks

!arnings Risk Rating


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Risk Imact


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"i#uidity Risk Assessment

Availa+ility of assets readily converti+le to cash&ithout undue loss

Access to money markets and other sources of funding

"evel of diversification of funding sources2 +oth onand off*+alance sheet

'he degree of reliance on short*term2 volatile sourcesof funds2 including +orro&ings and +rokered deosits2

to fund longer term assetsAroriate matching of assets and lia+ilities

"evel of / assets relative to lia+ilities

Risk Imact


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"i#uidity Risk Assessment

'he trend and sta+ility of deosits , li#uid assets>ritten olicies in lace for interest rate2 / and

li#uidity risks

'he a+ility to securiti-e and sell certain ools ofassets

'he caa+ility of management to roerly identify2measure2 monitor and control institutions li#uidity

osition2 including the effectiveness of fundsmanagement strategies2 li#uidity olicies2management information systems2 and contingencyfunding lans

"i#uidity Risk Rating


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Comosite Risk Assessment


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Comosite Risk Assessment

/ k f Ri k + d S i i


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/rame&ork for Risk*+ased Suervision

CORBASC!"S CAM!"S,CARAM!"S

/rame&ork for Risk*+ased Suervision


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CORBASC!"


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Thank you+Any uestions-

risk based supervision training grenada ta garfin sept 8 - 11,2014

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