Information Sources and Building Risk Indicators
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Transcript of Information Sources and Building Risk Indicators
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Information Sources and Building Risk Indicators
Nzomo Mutuku, Manager, Research & Development
Retirement Benefits Authority, Kenya
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Contents
• Information Sources• Building Risk Indicators• Kenya Risk Scores
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Risk Factors In KenyaInherent Risk
Investment risk
Insurance risk
Non-financial risk
Management and control
Trustee oversight
Operations and Control
Independent review
Capital Support
The Fund
The Employer
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Sources of Information - Kenya Periodic Scheme Returns
Registration Documents Annual Accounts Investment returns – six months Contribution returns – quarterly Investment Policy – Tri -annual Actuarial Valuations Tri - annual for DB Schemes only
On site inspections
Third Party reports – Interim administrators
Interrogatories and scheme self assessment
Mandatory exception reports – whistle blowing required
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Supervisory Organisation: Information SourcesType of Source Examples in Kenya Availability
Existing databases and documents provided for no-supervisory purposes
Industry Surveys and analyses (employer)
Low
Mandatory Exception Reports
Member complaintsService provider alerts
Medium
Information from on-site inspections
Inspection reports Low
Work commissioned by third parties
Inspection reportsInterim Administration reports
Low
Reports from entities to the supervisor
Annual AccountsInvestment returnsContribution returns Investment Policy Actuarial ValuationsInterrogatories
High
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BUILDING RISK INDICATORS
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RBA RISK INDICATORSRisk Factor
Inherent risk Management and control
Capital support
RiskIndicators
1. Investment risk•Investment Policy•Investment returns•Risk Measures2. Insurance risk•insurance risk insured•capacity to handle non-insured risk
3. Non-financial risk•simple plan provisions and procedures•transparent outsourcing•capacity to handle greater complexity
1. Trustee oversight•self-assessment•fit and proper criteria•lines of responsibility2.Operations and Control •Interrogatories•filing & contribution record•Number & resolution of complaints•expenses3. Independent review•use of independent professionals•reports without qualifications
1. The Fund• Funding /
solvency ratio• Deficit
recovery plan• Actuarial basis• Rates of
return2. The Employer• Timely
remittances• DB actuarial
assumptions• DC
communication to members
• Industry shape
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Step 1:Risk Assessment
• Each risk indicators is assessed on a point scale:• From Zero (very low risk) • To 1 (extreme risk)
• Compute Overall Risk Score(ORS) by weighting each area:
• ORS = I + M +C
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DC SCHEME
Inherent Risk W S WS Management and control W S WS Capital support W S WS
Investment risk 25% 0 X Trustee oversight 20% 0 X Fund 0% 0 X
Insurance risk 10% 0 X Operations and control 15% 0 XEmployer sponsor 10% 0 X
Non-financial risk 10% 0 X Independent review 10% 0 X 0
I M C
DB SCHEME
Inherent Risk W S WSManagement and control W S WS Capital support W S WS
Investment risk 15% 0 X Trustee oversight 10% 0 X Fund 25% 0 X
Insurance risk 15% 0 X Operations and control 10% 0 X Employer sponsor 10% 0 X
Non-financial risk 5% 0 X Independent review 10% 0 X I M C
Step 2:Risk Weighting
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Step 3: Deriving Scheme Risk Level Overall Risk Score(ORS) taken to fourth power to obtain the risk
probability index to obtain the probability of failure of a scheme
Assign the risk probability index of scheme to a risk level as per table below:
Risk Probability Index = (ORS)4
Overall Risk Score Risk probability index Risk levelLess than 0.5 <= 0.06 0
0.5 – 1.5 Above 0.06 to 5 11.5 – 2.5 Above 5 to 39 22.5 – 3.5 Above 39 to 140 33.5 – 4 Above 140 to 256 4
Basis of calculation is that probability of failure does not increase in a linear fashion,
but increases exponentially . 4th power simplification of
exponential formula
Basis of calculation is that probability of failure does not increase in a linear fashion,
but increases exponentially . 4th power simplification of
exponential formula
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Step 4 : Supervisory Response
11
Risk Level
Classification
Supervisory Response
0 Green No Action
1 Light Amber Monitoring - regular filing, close monitoring until normalized
2 Dark Amber Intensive Monitoring - questions to scheme administrators, intensive monitoring
3 Red Recovery Plan - recovery plan to be filed, approval and close monitoring of plan
4 Ultra Red Intervention - includes demands for additional funding, reduced benefits, interim administration, or closing the scheme
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Risk Score as at March, 2011, 647 Schemes
12
0
50
100
150
200
250
300
Risk Level 0-Green Risk Level 1-Light Amber Risk Level 2-Dark Amber Risk Level 3-Red Risk Level 4-Ultra red
45%43%
8%
3%2%
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Thank You
Asante
www.rba.go.ke