Understanding and Communicating the

Uncertainty and Ambiguity of Risk

Risk Management Practice Committee (Past and Present)

Simone Leas, Clearview

Kent Griffin, TAL

Anton Kapel, AMP

Joshua Corrigan, Milliman (chair)

Getting to grips with uncertainty

3

“Understanding” is the foundation of analysis and communication

Model Communicate

Predict Explain

Dynamics

Interactions

Conditional Factors

Probability

Knowledge

& Action

Understand

Evolution of Homo Actuarius

Guessing Data driven Statistics driven Data and hypothesis

Adaptive thinking

Image by Joshua Maggid

The Monty Hall Problem

A Bayesian and a Frequentist are out walking in a storm...

Frequentist vs Bayesian Frequentist Bayesian

Objective / physical – controlled random experiments (e.g. radioactivity)

Subjective / evidential – degrees of belief supported by evidence (e.g. medical diagnosis)

Stable and identical distributions – law of large numbers applies

Dynamic and regime dependent distributions with little data – works before the law of large numbers applies

Unconditional “x%” – just care about outcomes

Conditional “x% depending on…” – outcomes dependent upon prior information of underlying factors

Controlled repeatable random experiments (e.g. dice) – data derived long run frequency is key

No controlled experiments; fixed and typically little data; probability inferred based upon prior assumptions

No information prior to model specification Prior information abounds and is valuable (previous studies, researcher intuition, subject matter experts, etc…). It is mostly about the priors

Goes to heart of risk assessment… even for the most quantitative of risks

Source: Milliman analysis using Global Financial Data on the All Ordinaries Index

But wait, there’s more…

Source: Milliman analysis using Global Financial Data on the All Ordinaries Index

How do you model, predict,

explain and communicate the most data rich of risks, market risk?

Techniques to Characterise Uncertainty and Uncover Conditional Dependencies

• Statistical analytics

• Stochastic modelling

• Causal / structural modelling

• Stress and reverse stress testing

• Scenario modelling

• Predictive analytics

• Bayesian modelling

Discussion Questions

• Role risk plays in decision making at different corporate levels

• Useful risk collateral to support decisions

• Different modelling approaches for different risks?

• Different communication for different stakeholders

• Cognitive limitations and behavioural biases

• Framing risk information

• Communicating a holistic integrated perspective

Practical tips for Communicating the

Uncertainty and Ambiguity of Risk

Simone Leas

Head of Risk and Capital Management

Clearview Wealth Limited

Whose perspective is right?

All this information but keep it simple

Clear Visuals

BC Event Exp.

Amber Risks 1.Xx

2.Xx

Yellow Risks 1.Xx

2.Xx

3.Xx

4.Xx

Example of Risk Heat Map

OB Call Centre

Distribution

IFAs

Revenue (Products)

Wealth Product

Vol Disc MtM

IB Call Centre

Investment Perf

Front Office Back Office

HR Mangmt

Mkting Supp

Product

Actuarial

Int. Audit

Treasury SHF Perf

Legal, Comp

Capital

Economy

Competitors

Regulation Cat. Exposure

Brand Technology

Co

rpo

rate

Outsource

UP Co

ABC

Reinsurers

Sky

Asset Mgrs

DEF

XTP

Other Sys’s

People Soft,

etc etc Direct Mkting

Dealership

Support

Bus Devel

Life Wealth

Acquisition

U/W Adm

Maintenance

Adm Claims

MD, SMT

GHI

Governance

Strategy Projects & Exec.

RMF

Culture MIS Expenses

IT

Hardware

Production

Developmnt

Finance

Commission

Unit Pricing

Exte

rnal

Product, Pricing

LA LD Wlth

Red Risks xxxxxxxx

Life Advise Product

Vol Clm Lps

Clm

Direct Life

Vol Lps XYZ

Risk Mng

De

ale

rsh

ip

Aligned

Fin Comp

Employed

Fin Comp

Parra Planners

Vol Del

Strategic

Partners

Repetition

Start with the basics

Simple tips

KEEP IT SIMPLE

USE CLEAR VISUALS

REPEAT YOUR MESSAGE

START WITH THE BASICS

Implementing Risk Management Through Culture

Kent Griffin, CFO TALSeptember 2014

Risk & Uncertainty

“Risk – let’s get this straight up front – is good. The point of risk management is not to eliminate it;

that would eliminate reward. The point is to manage it – that is, to choose where to place bets and where to

avoid betting altogether.”Fortune, 2000

“Despite significant advancements on many fronts, improvements to risk management, if they are to prove durable, require deep cultural transformation

and investment in management time, people and finances to successfully execute and institutionalise.”

Ernst & Young

“Culture counts. A sound risk culture is likely to lead to the right risk outcomes, while a weak risk culture may promote the wrong outcomes — for customers

and/or the financial institution itself.”“Guidance on Supervisory Interaction with Financial Institutions on Risk Culture (A Framework for

Assessing Risk Culture),” Financial Stability Board, April 2014.

2

Risk and UncertaintyRisk management is about Managing Risk ie making decisions

3

Effective Risk ManagementRisk management is only effective if it impacts decision making

Risk-based Decisions

Risk Management FrameworkCapital Management Framework

Risk Appetite StatementQuantitative Risk Measurement

Qualitative Assessment

A meld of outputs from Strategy, Risk Management, Risk Appetite, Capital

Management and Strategic Frameworks

Decision CultureRight Time and Right People

Values Practices

BehavioursJudgementExperience

Decision making occurs at all levels of the organisation

Risk-Based Decision Making

Culture Matters

Actuarial analysis and insight must be timely, relevant, well communicated and understandable in the context of the decision which needs to be made.

Promoting the utilisation of the right information, by the right people, at the right time in order to optimise strategic and capital critical decisions.

4

Source: Global Regulatory Network Executive Briefing, Ernst & Young, June 2014

Effective Risk ManagementCulture is the platform which drives risk management

Page 1

Defining what good looks like

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Page 2

Behaviour engineering throughout the three lines of defence

Copyright © 2014 Ernst & Young Australia. All Rights Reserved. Liability limited by a scheme approved under Professional Standards Legislation

Managing Risk and Uncertainty is first and foremost an exercise in influencing human behaviour

Policies, frameworks, governances, reporting, quantitative measures are only effective if they are impacting decision making

It is the role of the risk practitioner (eg Actuary) to make their contribution timely, relevant, well communicated and understandable in the context of the decision which needs to be made

It is not the role of the decision-maker to necessarily be a risk professional or an actuary (“educating is not an alternative to communicating”)

5

In summary …Does your contribution to risk management impact behaviour?

Panel Discussion

Anton Kapel, Josh Corrigan

Simone Leas and Kent Griffin