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IOPS Toolkit for Risk-based Supervision Module 3: Risk Identification
Risk Focus Driven by: • Resources • Objectives • Nature of Pension System • DB funds – focus on funding + solvency, as well as trustee oversight ability • DC funds – focus on investment risk, costs and operational risks. The degree of competition also dictates the focus within DC systems • Risk appetite
Risk Factors • Market risk • Credit risk • Liquidity risk • Mismatch risk • Actuarial risk • Agency risk • Operational risk • IT risk • External & Strategic risk • Legal & Regulatory risk • Contagion & Integrity risk
Risk Indicators • Qualitative and Quantitative • Quantitative • DB – funding + solvency tests (also for DC with guarantees) • DC – VaR + replacement rate targets • Quantitative for non-financial risks • DB - number of complicating features, such as early retirement benefits, indexation etc. • DC - large range of investment options; central fund for allocating all investment earnings on a non-transparent, smoothing basis; level of outsourcing • But qualitative indicators involving judgement also required
Systemic Risk • Risks can be identified and assessed on two levels: • Micro – ‘bottom up’ – risks at the level of individual supervised entities • Macro – ‘top down’ – risk on a sector/industry or thematic basis • Systemic risk particularly important • When overseeing large number of fund • In developing markets with new pension systems • At particular times (e.g. extreme market volatility / financial crisis) • Build into overall risk analysis • Within individual risk assessments / or as separate layer of analysis • By pre-populating scores for these risks/ or leaving them to the individual supervisor’s judgement
Systemic Risk – HFSA Sources of Information • Findings of institution assessment • Monitoring information and messages • Trends revealed in customer complaints • Consumer protection (monitoring of product and service advertisements, information from interest-protection organisations) • Market supervision (market data) • Signals from macroeconomic and sector analysts (monitoring and analysis of risk priorities, domestic and international trends and phenomena) • Information from contact persons of the institutions with below average impact rating • Information from trade associations • Information from supervised institutions (e.g. requests for opinions) • Information received from law enforcement and licensing • Information received from domestic and foreign partner authorities • Information forwarded by domestic and international working groups • Other sources
Thank You Presentations of practical examples to follow