Risk-based Supervision

1
Risk-based Supervision

• Solange Berstein
• Chair IOPS Technical Committee
• Superintendent
• Pension Supervisor
• Chile

2
Agenda

• Motivation
• Comparing Two Supervisory Models
• Working Plan
• Defining the Objective
• Supervision Process
• Knowledge
• Assessment
• Follow up
• Where are we now?

3
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

4
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

5
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 regulators concerns Make explicit the mayor concerns
Supervisors Orientation to verify compliance with norms Enchanced analytical capacity judgment call is required
6
Working Plan
7
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

8
Supervisory Process
9
Knowledge

• The main activities and elements required are
• Information gathering
• Information analysis
• On-site visits
• Integrated information system.

10
Assessment Industry Risk Factors
11
Assessment Significance Weights
12
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

13
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.

14
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

15
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