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Risk-based Supervision

This article discusses the implementation of risk-based supervision in Chile, its main objectives, benefits, and the progress made so far in assessing risks and implementing recommendations. It also compares two supervisory models and outlines the working plan and future goals.

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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. Where are we now? • Risks of five of the six pension fund managers have been assessed, the last one is a new company for which information is being collected at this stage. • 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.

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