Transcript Our Vision - ISDA - International Swaps and Derivatives

Managing risk at the UK’s
largest Friendly Society
Alistair Smith
May 2006
Personal background
• Head of Risk at Liverpool Victoria since
November 2004
• Responsible for the risk management
framework, FSA change and the MRLO
• Previously managed the project to implement
an enterprise risk framework at Lloyds TSB
and was responsible for the ICOB and TCF
programmes for retail banking
What is a friendly society?
• A mutual association for insurance like
purposes, and often, especially in the past,
serving ceremonial and friendship purposes
also. It is a benefit society composed of a
body of people who join together for a
common financial or social purpose.
Historical origins
• 1793 first Friendly Society Act enacted by
parliament, which declared it legal to form:
“….societies of good fellowship, for security
against the risk of sickness, age, infirmity and
death of the breadwinner”.
• Out of these societies sprang the “collecting
societies”, which employed collectors to bring
in subscriptions and bring in new members”.
Origins of Liverpool Victoria
• Founded by business men in 1843 as the
Liverpool Independent Legal Victoria Burial
Society
• Response to widespread unemployment and
a 50% drop in wages for unskilled workers in
Liverpool from 1835 - 1842, which meant that
the poor could not bury their dead
Recent history
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1995 bought Frizzell Group
1997 acquired Landmark Insurance
2000 acquired Permanent Insurance
2001 acquired Bishopscourt Financial
Holdings
• 2001 acquired Royal National Pension Fund
for Nurses
Liverpool Victoria today
• 1m members & 1.5m customers
• Life business
• GI business with 3/4 million motor & 1/2
million household policies
• Bank
• Asset management business with £8bn
under investment
• Affinity business
Links to our heritage
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Remain committed to mutuality
24/7 member support line
Member care and support fund
All members have an equal vote
National and regional member panels
Product discounts for members
Governance
Policy and Risk Oversight, Support
and Independent Assurance
Strategy, Performance, Policy Setting
and Risk Management
LVFS Board
Nominations and
Remuneration committee
Life Supervisory Board
Subsidiary
Boards
Group Audit &
Compliance
Committee
Group Chief
Executive
Group
Directors
Group Executive
Committee
Group
Capital
Management
Committee
Group
Risk
Committee
Group Director
Corporate Governance
Development
Review
Committee
Head of
Audit
Our Control Principles
• Senior managers acts as stewards of
members’ assets. The stewardship role has 5
main principles:
– Centralised model of Board & Executive control
– Single point accountability
– Accountability delegated to the senior manager
closest to the activity
– Risk management is an integral part of this
– Framework of committees to oversee key risks
Apportionment of Responsibilities
• Group Accountabilities Chart apportions
responsibility amongst the Group Executive
• Each member of the Group Executive has
their own Accountabilities Chart to apportion
responsibility for an activity to a senior
manager
• Individual accountabilities are detailed in Role
Profiles
Culture
• Aspire to be the most trusted financial
services company in the UK
• “Do the right thing” by customers
• Be risk aware not risk averse
• Be compliant with regulation and legislation
Why do we manage risk?
• To identify events that may adversely affect
the achievement of our strategy, so that we can
take action to mitigate them
• To ensure that the risks we are taking are
appropriate in relation to the potential rewards
• To ensure that if adverse events do occur we
can respond quickly and limit damage
• To limit the amount of capital we need to set
aside to protect members against losses
Risk classification
• Strategic risk - political, economic, social,
technological, competitive
• Market risk - equity values, interest rates, property
• Insurance risk - rise in claims amount/frequency
• Operational risk - people, processes, systems
• Credit risk - default on bank lending, reinsurance
• Liquidity risk - ability to meet payments on time
• Group risk - risk from being part of a Group
Risk Appetite
• Overall risk appetite has been agreed by the
Board in terms of regulatory capital required
to remain solvent at a 99.5% confidence level
• Risk limits also set for individual mapped
risks
Embedding Risk Aware Culture
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Induction training
Management training
Internal communications
Performance management objectives
Incentives which reward compliant
behaviour and penalise non-compliance
• Treating Customers Fairly programme
Treating Customers Fairly
• CEO sponsors the programme and I manage
it
• Asked senior managers from across the
business to decide how customers should be
treated to achieve our aspiration to be most
trusted
• Facilitated the process and fed it external
thinking
Treating Customers Fairly
• Business functions considered were:
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product development
financial promotions
sales
after sales service
claims
complaint handling
management of with profits fund
Treating Customers Fairly
• Undertook gap analysis between current
practices and desired position
• Developed action plans to close the gap
• Report progress to Group Risk Committee
monthly and FSA bi-monthly
• Embedding in processes
The risk management process
Identify (Risk Mapping)
(MI, Risk Monitor
committees,
Audit)
(Policies,
Control
management
action)
Assess
(Impact &
probability)
Respond
(Avoid, Reduce,
Share, Accept)
Identifying risk
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Risk mapping
Key risk indicators
Scenario planning
Stress testing
Use of IT systems
Loss event tracking
Assessing Risk
• Risk is assessed in terms of impact and likelihood
• Qualitative risk assessment is generally used for
assessment of operational risk
• Quantitative approaches are the norm for financial
risks e.g. credit scoring for credit risk and
stochastic and deterministic modelling for
financial risks.
Responding to Risk
• Avoidance
• Reduction
• Sharing
• Acceptance
Controlling Risk
• Policies and procedures
• Management action
• Physical controls
• IT controls
Monitoring Risk
• Risk Indicators
• Management review
• Oversight committees
• Internal Audit
• External auditors
• Regulatory authorities
Risk oversight Committees
• Risk Committees oversee management
of market, insurance, liquidity, credit and
operational risk, ensuring it is effective
and in accordance with policy
• Executive Committees oversee the
management of strategic risk.
Regulation
• Supervised by the FSA through its major
retail groups division
• Close and continuous relationship
• Full Arrow visit every 24 months
• Themed reviews in the interim
Questions?