Momentum Conference 2012: Review of Workshop C5: Risk appetite and embedding it into the business

Risk management – more boxes to tick or a culture change?

As a pensions actuary, I’m used to thinking about how risks are quantified and discussing these, along with unquantifiable risks, with trustees.  However, what this session challenged me to do was think more about how risk appetite is discussed and agreed at company board level (or not, as the case may be) and how this is cascaded down the business and, hopefully, becomes engrained in the culture of its staff.

Many company boards (and we were thinking mainly about insurance and Lloyd’s syndicate companies during this session) might not have truly assessed their risk appetite and tolerances and, as such, this may be dictated to them by their existing business operations and reserving models, rather than the other way around.  Only when a desired risk appetite and tolerance have clearly been established can risk then start to drive business operations and staff behaviour in a consistent way.

The presenters shared their experiences of how a desired risk culture can successfully be embedded within business:

• accountability and a trusting relationship between management and staff helps to engage staff;
• education helps to avoid a “tick-box” mentality (or seeing risk managers as being a pain);
• regular monitoring processes and clear reporting lines help to ensure good and prompt decisions making;
• clear committee terms of references ensure decisions are made by the right people; and
• policies for dealing with staff who step outside risk boundaries can help to promote desirable staff behaviours.

Other more general comments included:

• large, fragmented, companies can face major difficulties in getting a consistent approach to risk;
• “herd mentality” and fear of being challenged is at danger of stopping company boards making clear and explicit statements about their own preferred risk appetite;
• staff turnover can create difficulties in keeping a consistent risk approach; and
• a difficulty the risk management industry faces is that the benefits cannot easily be measured (does anyone know or remember what “near misses” they had that good risk management has avoided?).

The session really got me thinking about how the same principles are being applied to pension schemes.  A couple of thoughts were:

How much of a role should the risk appetite of sponsoring employers play in the running of pension schemes?  A well-defined and stated risk appetite and framework would be a real benefit to covenant discussions (although I suppose risk seeking companies might be fearful of how trustees could view this!).

Can or should risk appetite be dictated by history?  It sometimes feels that risk appetite can be a backwards looking thing (particularly due to the way the on-going pension scheme valuation process works).  Is this just a practical approach to risk appetite, or a flaw that we could question to a greater extent?

The session was done off the back of a market study of risk appetite, recently released by Grant Thornton.