Guideline 32. Mitigation of risk

Submitted by Anonymous (not verified) on Tue, 07/10/2018 - 09:46

Once risk has been identified and measured, the social security institution makes appropriate decisions regarding the mitigation and treatment of risk.

This guideline covers how the social security institution treats risks. Even though certain areas of operation of the social security institution and/or social security scheme may accept higher risk when this is rewarded, this decision should be made in the context of reducing overall system risk or risk to society. Therefore, the treatment of different risks, including the possible reduction of risk and the choice between retaining and transferring remaining risk, should be undertaken in the context of an overall risk mitigation objective.

Guideline code

ACT_03700

Mechanism

Risk may be reduced through primary or preventive measures (measures taken to reduce the frequency of risk, for example, healthy eating initiatives), and secondary measures which focus on reducing the severity of impact of the event, for example, return-to-work measures for those receiving disability benefit. Secondary measures seek to reduce both the mean outcome and the distribution or variation of outcomes. The actuary should provide input into the possibilities and implications of both approaches.
Once risk has been mitigated, decisions regarding further treatment will depend on the desired and possible allocation between retained risk and transferred risk. The actuary should take into account any legislation or other constraints which limit the scope of such decisions, as well as the risk transfer mechanisms available. When the risk function makes the decision to retain or transfer risk, actuaries should consider the:

Predictability of risks;
Ability of the covered population to take on risk;
Size of the covered population over which the risk can be spread;
Cost of transferring risks;
Absolute levels of risk;
Availability of suitable risk transfer processes and their cost for both the social security institution and the covered population;
Ability to manage and/or control risk within the organization.

The retained remaining risk should be managed and further mitigated, where appropriate, on a continuous basis. The financial implication of the retention of risk should be assessed and monitored on a regular basis. An inventory of retained risk should be maintained and updated as appropriate. A regular review and escalation process for the risk register should be established.
The transfer of risk will depend on the factors referred to above. The actuary is likely to provide input into the decisions regarding how to transfer risks and the costs involved, as well as the process of selecting the appropriate transfer mechanisms and external providers. The actuary will work closely with other professionals involved in the process.

Parent

E. Risk Management and Analysis

Structure

Principles

It is important to distinguish between the different types of risk when deciding on what (element of) risk to retain and what to transfer. Social security schemes exist to provide benefits and services to respond to life-cycle risk, and therefore act as takers of risk for, and from, the population covered. By accepting the responsibility for management, financing and delivery of social security benefit, the social security institution itself becomes exposed to certain risks. The choice regarding retention or transfer of risk requires an assessment of the cost and benefits to society of either approach, and a judgement on the most appropriate balance. This is particularly true in the case of investment risk but also in other areas of activity, for example operational risk, where a choice will be made depending on resources available within the institution as well as on external options and their cost. Reference to the risk budget in these decisions is essential.
A social security institution needs to be rewarded sufficiently for taking certain risks. If this reward is not adequate, then a reduction or transfer of risk should be sought. The reduction of risk may be straightforward, but in most situations it comes at a cost (e.g. lower expected investment returns). The actuary should continually assess this likely cost. However, the trade-off is unlikely to be simple to determine in many areas of operation, and decisions will be based on considerations involving many areas of operation of the institution (benefit design, financing, communication, investment, etc.). Therefore, it is important that a holistic view is taken when decisions are made.

Tags