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Risk-based Supervision

Explore the implementation of Risk-based Supervision (RBS) in Chile's pension sector, comparing two supervisory models, defining objectives, assessing risks, and monitoring progress. Learn about the main changes, benefits, challenges, and current status.

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Risk-based Supervision

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  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

  6. Working Plan 2005 2006 2007 2008 2009 2010 • Get familiar with RBS • Diagnosis • Design • Development of framework legislation • Revision of methodology and improvement of supervision guides • Staff training (which included a visit to APRA) • Pilot implementation

  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 I. Knowledge III. Follow-up II. Assessment

  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

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