Showing posts with label supervisor. Show all posts
Showing posts with label supervisor. Show all posts

May 1, 2011

The Ten Actuarial Commandments

We all (think to) know The Ten Commandments from the holy scripts by heart, do we?

Now close your eyes to see how far you can get in quoting those simple ten guidelines in life.............

The Ten Commandments for Investors
Just like the Ten Commandments for Man, God - more specific - created The Ten Commandments for Investors. Let's compare the two, while - at the same time - you can check out your Commandment-Memory on Man as well:

Risk-Return-Supervision Development
As you may have noticed, The Ten Commandments are a mix of rules-based and principles-based principles.

Just as in our own life, it's interesting to see how we apply and implement these two different kind of rules during the evolution of a financial institution (insurance company, pension fund, bank, etc.):

In time, the ideal supervision model consists of three phases:

  • Phase I: No rules
    In this phase we cannot value or the company. Chances are substantial the company is 'at risk'.

  • Phase II: Rules-Based Supervision
    In phase Ia 'Rules' are mostly perceived as 'Have to's" . As a result Risk will be reduced, but Return as well. Once the board, actuaries and financial specialists are becoming aware and will see the advantages and new possibilities of managing risk. 'Have to's" will develop into 'Want to's" . The Risk-Return Ratio will increase  and even a better Return will result.

  • Phase III: Principles-Based Supervision
    Just like with the implementation of Rules-based Supervision, in case of Principles-Based Supervision, the Financial Institution needs time to adept to the new situation. At first there might be a unbalance between Risk and Return. It takes time to calibrate Risk and Return again.

    After a while actuaries, investors and management will translate Rules-Based principles into own rules that fits the company's specific risk in an optimal way. The company will be able to take more risk and to optimize its own Risk-Return Ratio.

Take a look at your own company's development and see for yourself where you fit in on the Risk-Return-Supervision lines....

It might be possible that you have to conclude that you aren't able to increase your Risk-Return ratio in the end. In this case it's likely you've become (so called) 'Supervisory Compliant': Your risk appetite probably corresponds more or less with the supervisor's minimal risk view. Instead of redefining your own risk appetite and restructuring your products from a risk-management perspective you merely implied new regulations and supervisor guidelines. As a result your Return and Risk-Return Ratio implode....

Ten Actuarial Commandments
Having learned the possible effects of supervisory rules in practice, we may now conclude with The Ten Commandments for Actuaries.

The Ten Commandments for Actuaries
  1. There's only one God, as he's omnipotent he's also an actuary.
    As you're only an actuary: be humble.....    Remember: As God wants something in Return, you'll have to take Risk!!
  2. Reality can't be comprised in a model.
    Use your brains. A model is a help, not a decision machine. Don't mix up God with Risk or Chaos. Chaos for us humans (actuaries) can be defined as "Unrecognized Order" (quote). 
  3. Never blame anything or anyone than yourself for an unexpected or negative outcome.
  4. Be consistent, act sustainable. But change your opinion just in time, if circumstances or facts urge you to do so.
  5. Alway show respect to others, even if you think different. Appreciate where you come from. Nobody is perfect, not even you.
  6. As there is no 'right' model, never criticize other models, actuaries or other people. Try to give your opinion without slaughtering the other.
  7. Never advice or state anything you do not really mean or cannot defend.If you're not sure or don't know, tell it or get help.
  8. Always cite your sources or give credits to others that helped you.
  9. Don't 'steal' the advice.
    Never include the final decision to be taken in your advice. Wrap up arguments, consequences and present scenario's so the board has to make a choice and not you.
  10. Don't get carried away by results, reports or performances of others.
    Stick to your own consistent approach.

Apply supervisory rules and actuarial commandments in a conscious way...

Mar 5, 2011

Supervisory Compliant, is it enough?

Risk management is tricky business... Being 'Officially Compliant', 'Just Compliant' or in other words "Supervisory Compliant", is not enough to help your CEO survive with your company in the complex market battle!

Whether you're an Actuary or Risk Manager of an Insurance company, Bank or a Pension Fund, the risk of being 'Supervisory Compliant' is simply : bankruptcy!

Becoming 'Supervisory Compliant' in complex programs like Solvency-II, Basel III or Legal Pension Fund Risk Frameworks, consumes so much time and effort, that almost no time seems to be left for contemplating or doing the essential Risk Management work properly.

Just being 'Supervisory Compliant' implies:  constantly running after the Supervisor to become  'just in time' officially compliant and not having enough time to think about the (f)actual relevant risks.

Supervisory Compliance becomes very frighting when Risk Appetite and Valuations are rashly based upon the minimum Supervisory requirements, as is (e.g.) the case in the Dutch Pension Fund legal framework. Boards stop thinking about the actual risks and feel compliant and satisfied once the Supervisory Compliance Boxes are checked.

A new look at compliance
Let's take a look from a new point of view at the complete Risk Management Compliance Field:

In basis there are three types of 'being compliant':

  1. Supervisory Compliant
    When you're Supervisory Compliant, you officially comply to all legal Risk Management compliance requirements. Your Supervisor is happy...

  2. Professional Compliant
    You comply to your own professional Risk Management standards. You are happy...  but what about your Supervisor? Comply or Explain....

  3. Success Compliant
    Being Success Compliant implies that all Risk Management requirements that are key to have success - e.g. key to survive in the market on the long run - are met.

Let's zoom in at some specific areas in this chart:

Bias areas
It's perhaps hard to admit, but in our attempt to be complete, we define and manage a lot of (small) risks that do actually exist, but are in fact not really or limited relevant with regard to company continuity.

Distinctive Character area
The Distinctive Character area is perhaps the most interesting area. To get grip on this area urges us to 'Think outside the Circle'.

By doing so we'll be able to manage risks that  our competitors fail to do. Here we can achieve 'Distinctive Character' by managing risks more efficient or by turning risks into profits. Examples are: Derivatives that limit our investment risks. Specialized experience rating (rate making) on your portfolio on basis of characteristic and unique risk profiles.

Tricky area
The tricky area is the area that consists of Supervisory Risks you tend not to find important, but that are very important for achieving success in the market. Tricky areas could e.g. be: Deflation Risk, Longevity Risk or Take Over Risk.

Reversed Thinking area
This is perhaps the most interesting risk area.

To explore this area you'll not only have  to 'think outside of your circle', but - just like in reversed stress tests with Banks - try to think backwards, to find out what could cause a certain event or loss.

This reversed thinking process succeeds best as a group. Group members should be professionals and non-professionals from different types of business, education and background.

A successful group mix could e.g. consist of : an actuary, an accountant, a manager, a marketing manager, a compliance officer, an employee, a client, a shareholder representative and last but not least the receptionist.

Try to find time to manage your company to new heights and stop being just 'Supervisory Compliant'.....

Apr 30, 2009

DNB report on Credit Crisis

As experienced actuaries you'll probably know that 'De Nederlandsche Bank' (DNB) is the Dutch supervisor on banks, pension funds, insurers and mutual funds.

Recently DNB reported about the effects of the credit crisis.

You may find the report in the recently published:

Main articles in this interesting bulletin discuss the following topics:
  • Capital market financing more difficult and more expensive in 2008
  • Dutch banks scaled down foreign activities
  • Dutch pension funds fail in realizing indexation ambitions in 2009

The bulletin also includes a description of the fully revised statistics of investment funds.

The Dutch save massively for their pensions. To supplement their future state old age pension, nearly 6 million employees save for a pension at a pension fund. At end-2007, over 2.5 million persons received a pension benefit.

These savings have accumulated into a collective nest egg of around EUR 575 billion, i.e. nearly EUR 80,000 per Dutch household (end-2008).

For many households, pension savings are by far their largest financial asset. As a result of the credit crisis, pension funds saw their financial position deteriorate. In 2008, the pension funds’ average nominal funding ratio dropped from 144% to 95%

Chart: Funding ratio.
Broken down by interest rate effect and return on equities

According to a survey among the largest 25 pension funds, the pension sector, too, is being impacted by the credit crisis.

Following catch-up indexation last year, pension benefits will probably be indexed on average at a mere 0.2% this year. This means a loss of purchasing power for pensioners, even though the price level has fallen since the summer of 2008. Many pension entitlements accrued by employees, too, are not being indexed.

In 2009, pension contributions will rise, especially those of employers with an independent company pension fund. Employees, too, will be paying higher contributions.

Interested? More info at DNB