Risk-based Supervision

Solange Berstein Chair IOPS Technical CommitteeSuperintendentPension SupervisorChile

Agenda

1. Motivation2. Comparing Two Supervisory Models3. Working Plan4. Defining the Objective5. Supervision Process

I. KnowledgeII. Assessment III. Follow up

6. Where are we now?

RBS Main Objectives

EXPECTED OUTCOMES

Preventive approach Encourage prudential administration of supervised

entities Focus on what is important and not the urgent Learning by doing of supervisory activities

RBS Main Benefits

EXPECTED BENEFITS

Better visibility of the areas with greatest risks More effective control measures and supervisory activities Reduce claims from members Alignment with international standards of regulation Disclosure and transparency to the market

Main Changes: Comparing Two Supervisory Models

Supervision by Compliance Risk Based Supervision

Focus Reactive Preventive

Priorities All subjects Priority to most critical and poorly evaluated areas

Resorces allocation Less flexibility More flexibility

Transparency Lack of knowledge of the regulator’s concerns

Make explicit the mayor concerns

Supervisors Orientation to verify compliance with norms

Enchanced analytical capacity judgment call is required

Working Plan

2005

•Get familiar with RBS

2006

•Diagnosis

2007

•Design

2008

•Development of framework legislation

2009

•Revision of methodology and improvement of supervision guides

•Staff training (which included a visit to APRA)

2010

•Pilot implementation

Defining the objetive

• To build the model it is necessary to have clear the objective

• For the Superintendence of Pensions in Chile the main focus for Supervision was defined to be: Fiduciary Responsability of Managers

SUPERINTENDENTSUPERINTENDENT

INTENDENTOF SUPERVISION

INTENDENTOF SUPERVISION LEGAL DIVISIONLEGAL DIVISION INTENDENT OF

REGULATIONINTENDENT OF

REGULATION

FINALCIALDIVISIONFINALCIALDIVISION

BENEFITSDIVISIONBENEFITSDIVISION

CONTROL DIVISIONCONTROL DIVISION

MEDICALDIVISIONMEDICALDIVISION

REGULAIONDIVISION

REGULAIONDIVISION

CUSTOMERS SERVICE DIVISION

CUSTOMERS SERVICE DIVISION

STUDIESDIVISIONSTUDIESDIVISION

IT AND ADMINISTRATION

IT AND ADMINISTRATION

SUPERVIZED ENTITIESSUPERVIZED ENTITIES REGULATED SYSTEMSREGULATED SYSTEMS

LEGAL CONTROLLEGAL CONTROL

Organization Structure of Supervisor

SUPERINTENDENTSUPERINTENDENT

INTENDENTOF SUPERVISION

INTENDENTOF SUPERVISION LEGAL DIVISIONLEGAL DIVISION INTENDENT OF

REGULATIONINTENDENT OF

REGULATION

FINALCIALDIVISIONFINALCIALDIVISION

BENEFITSDIVISIONBENEFITSDIVISION

CONTROL DIVISIONCONTROL DIVISION

MEDICALDIVISIONMEDICALDIVISION

REGULAIONDIVISION

REGULAIONDIVISION

CUSTOMERS SERVICE DIVISION

CUSTOMERS SERVICE DIVISION

STUDIESDIVISIONSTUDIESDIVISION

IT AND ADMINISTRATION

IT AND ADMINISTRATION

SUPERVIZED ENTITIESSUPERVIZED ENTITIES REGULATED SYSTEMSREGULATED SYSTEMS

LEGAL CONTROLLEGAL CONTROL

Organization Structure of Supervisor

SUPERINTENDENTSUPERINTENDENT

INTENDENTOF SUPERVISION

INTENDENTOF SUPERVISION LEGAL DIVISIONLEGAL DIVISION INTENDENT OF

REGULATIONINTENDENT OF

REGULATION

FINALCIALDIVISIONFINALCIALDIVISION

BENEFITSDIVISIONBENEFITSDIVISION

CONTROL DIVISIONCONTROL DIVISION

MEDICALDIVISIONMEDICALDIVISION

REGULAIONDIVISION

REGULAIONDIVISION

CUSTOMERS SERVICE DIVISION

CUSTOMERS SERVICE DIVISION

STUDIESDIVISIONSTUDIESDIVISION

IT AND ADMINISTRATION

IT AND ADMINISTRATION

SUPERVIZED ENTITIESSUPERVIZED ENTITIES REGULATED SYSTEMSREGULATED SYSTEMS

LEGAL CONTROLLEGAL CONTROL

Organization Structure of Supervisor

1. Knowledge

2. Planification

3. Assessment4.

4. Documentation and Actions

5. Comunication

6. Follow Up

• Directors Committee• Supervisory Committee• Intendent of Supervision• Financial, Control and Benefits

Divisions• RBS coordinator• Regulation Division, Studies

Division and Customers Service Division

• Supervisory Committee• Intendent of Supervision• Financial, Control and Benefits

Divisions

• Intendent of Supervision• Financial, Control and Benefits

Divisions• Supervisory Committee• Sanctions Committee• Legal Division

• Directors Committee• Legal Division

• Supervisory Committee• Financial, Control and Benefits

Divisions

Supervisory Process

Knowledge

• The main activities and elements required are:

Information gathering;

Information analysis;

On-site visits;

Integrated information system.

Planification

Directorio 0 0 0Aptitudes e idoneidad del Directorio 3 3 3Funcionamiento del Directorio y de los Comités de Directorio 3 3 3Definición y seguimiento de la política global de gestión de riesgos 5 5 4Definición de la Estrategia 3 3 3Política de Divulgación y Transparencia 6 6 4Gestión del Riesgo Reputacional 2 2 2Administración 0 0 0Composición y Estructura de la Administración. 3 3 3Proceso de Planificación y Administración. Divulgación y Transparencia. 4 4 4Sistemas de Información de Gestión 2 2 2Gestión de Riesgos 0 0 0Cultura de Gestión de Riesgos 5 3 3Gestión del Riesgo de Cumplimiento 3 3 3Gestión de Riesgo Fiduciario 3 3 3Riesgo Financiero 0 0 0Riesgo del Proceso de Inversiones 5 3 5Riesgo de Crédito 3 3 3Riesgo de Liquidez 2 2 2Riesgo de Mercado 2 2 2Riesgo de Solvencia de la Entidad 2 2 2Riesgo Operacional 0 0 0Riesgo en la Relación con los Afiliados 3 3 3Riesgo de Gestión de Cuentas 3 2 3Riesgo de Beneficios 2 2 2Continuidad de Negocio y Recuperación de Desastres 3 3 3Riesgo de Subcontratación 4 4 3Riesgo Tecnológico 3 3 3

Regular Supervision

Preventive Inspection

Compliance Supervision

Risk Matrix

Assessment: Significance Weights

Assessment: Industry Risk FactorsÁrea Criticidad Evaluación

DirectorioAptitudes e idoneidad del Directorio A,B,C 1...6Definición y seguimiento de la política global de gestión de riesgos A,B,C 1…6Funcionamiento del Directorio y de los Comités de Directorio A,B,C 1...6Definición de la Estrategia A,B,C 1...6Gestión del Riesgo Reputacional A,B,C 1...6Política de Divulgación y Transparencia A,B,C 1...6AdministraciónComposición y Estructura de la Administración. A,B,C 1...6Proceso de planificación, administración, divulgación y transparencia. A,B,C 1...6Sistemas de Información de Gestión A,B,C 1...6Gestión de RiesgosCultura de gestión de riesgos A,B,C 1...6Gestión del Riesgo de Cumplimiento A,B,C 1...6Gestión de Riesgo Fiduciario A,B,C 1...6Riesgo OperacionalRiesgo en la Relación con los Afiliados A,B,C 1...6Riesgo de Gestión de Cuentas A,B,C 1...6Riesgo de Beneficios A,B,C 1...6Riesgo Tecnológico A,B,C 1...6

Continuidad de Negocio y Recuperación de Desastres A,B,C 1...6Riesgo de Subcontratación A,B,C 1...6Riesgo FinancieroGestión del Riesgo de Mercado A,B,C 1...6Gestión de Riesgo de Crédito o Contraparte A,B,C 1...6Gestión del Riesgo de Liquidez A,B,C 1...6Gestión del Riesgo de Solvencia de la Entidad A,B,C 1...6

Assessment: Global Scoring

• A global scoring is assigned to every supervised entity taking into consideration the inherent risk of each area, sub-area within the entity and the quality of controls for each inherent risk.

So, the global scoring combines the significance weights and the assessment of control quality.

• The global scoring takes values between 1 and 5. A score equal to 1 → lowest net risk A score equal to 5 → highest net risk

• The risk matrix looks at: The risk level Controls’ quality Global scoring Change in evaluation over time

Communication• A summary document is given to the entity with

the opinion of the Supervior: Strengths and Weaknessess Global Scoring Recommendations with priorities

• The Superintendent and intendent of supervision meet with the board

• When there is a sanction this is also communicated to the entity

Follow up

• An end-product of the assessment efforts

• Main activities, varying intensity according to necessity: Monitoring and general follow-up On-site inspections focused on specific topics Action Plans with the objective of improve weak points Integral on-site inspections according to a predefined

supervision plan Periodic meetings with main executives and board of

directors Intervention in specified cases of insolvency.

Challenges throughout the process

• Building the model: important to have clear which is the goal• Getting supervisors familiar and to finally be owners of the

model• Make the industry accept and acknowledge the importance

of the new approach of supervision• Changes on the structural organization of the supervisory

agency• Implementation in parallel to the traditional activities of

supervision• Integrating all the activity of the Supervisory entity within

the RBS approach

Where are we now?• Risks of five of the six pension fund managers have been

assessed.• Risks for the unemployment insurance managers were also

assessed.• The model for the public pension provider is being build.• The superintendence is doing the following up of the

recommendations that came out from the assessments.• A number of areas of each pension fund were reviewed with

a preventive approach• The risk matrix is being updated with the information from

the follow up process and the preventive evaluations by area