ICP 8: Risk Management and Internal Controls Conor

Transcript:ICP 8: Risk Management and Internal Controls Conor:
ICP 8: Risk Management and Internal Controls Conor Donaldson IAIS Head of Implementation Santo Domingo, Dominican Republic, 9 April Case of HIH Effective risk management – why it matters ICP 8 Conclusions 2 Case of HIH – background information Founded by Ray Williams in 1968 Australia’s 2nd largest non-life insurer Workers compensation, liability and indemnity In Australia, UK and California (USA) In late 1990s, asset of A$7 billion, revenue of A$4 billion and operating profit of Australian$ 60 million Bankrupt in 2001 Largest corporate failure in Australia 3 *case based on the report of the HIH Royal Commission (www.hihroyalcom.gov.au) Case of HIH – areas of deficiency (1) Ray Williams – dominant CEO with much discretion no limits on CEO’s authority (investments, donations etc.) Powerless Board Lack of critical analysis or challenge of Williams as CEO No major involvement in the process of determining the scope of information presented to the Board Lack of strategy, Board of Directors did not understand business or strategy No real discussions of the strategy by the Board No involvement when entering or retreating from overseas 4 *case based on the report of the HIH Royal Commission (www.hihroyalcom.gov.au) Case of HIH – areas of deficiency (2) Other Senior Management without accountability Performance review was not tied to remuneration process Reckless underwriting and fictitious financial reporting Very dependant on consulting actuary when setting the amount of reserve External auditor with conflicts of interest, lack of actuarial knowledge to monitor the sufficiency of reserves 5 HIH Royal Commission (2003, xvii) Case of HIH – areas of deficiency (3) “Why was there such serious under-reserving and why were the risks not properly priced? The answer here is that HIH was mismanaged. The factors contributing to the mismanagement of the group ... are many, varied, and complex. … They are epitomized by a lack of attention to detail, a lack of accountability for performance, and a lack of integrity in the company’s internal processes and systems.” 6 HIH Royal Commission (2003, xvii) Case of HIH Effective risk management – why it matters ICP 8 Conclusions 7 Effective Risk Management – Why it matters Many financial losses occurred due to lack of proper risk governance, risk management and internal controls. Examples of weaknesses: Lack of adequate management oversight and accountability, Failure to develop a strong control culture Inadequate recognition and assessment of risks Absence or failure of key control structures and