Excellence in administration

  • Guidelines:
  • Actuarial Work for Social Security

Excellence in administration

  • Guidelines:
  • Actuarial Work for Social Security

Actuarial Work for Social Security -
Guideline 30. Risk management framework

The social security institution establishes a risk function that oversees the management of risk and reports to the board, if any, and/or management. This function, and the processes carried out or overseen by it, require actuarial input. The risk function coordinates with other functions to ensure effective risk management.

Due to their understanding of risk issues, actuaries should be involved in the management of risk within a risk management function and/or involved in the risk management process. This may include contribution to a risk management plan and the setting of an appropriate risk budget and/or risk appetite for the social security institution.

The issue of risk is increasingly important for social security institutions due to the complexity of benefit provisions and financing, the risks inherent in the investment process, the use of information and communication technology (ICT), and reputational risk linked to the increasing scrutiny of what social security institutions do and how they do it. In addition, an understanding of potential changes in the external environment will also be required to ensure that appropriate analysis is undertaken today to anticipate the evolution of risks in the future. Many institutions have responded to this reality with the creation of specific risk management functions or departments facilitating the input of risk specialists, including actuaries, in this area.

The management of risk enables the social security institution to increase the likelihood of achieving its objectives. However, managing risk is not simply a passive exercise where the institution responds to the risks it faces; it requires the setting up of a project management cycle to define the risk appetite and risk budget of the institution, assess the risks faced by the institution now and in the future and make the most appropriate decision on the treatment of risk.

An effective governance structure is an important element of risk management. It should ensure that sufficient information on risks is collected and managed and that appropriate structures and mechanisms are put into place to address them.

Actuarial involvement in risk management touches on many aspects of social security institutional practice. Other individual guidelines in this document refer to risk issues in different areas such as investment, financing and benefit design. These specific considerations will feed into the overall risk management considerations and process set out in this part.

Social security seeks to respond to the life-cycle risks of the population it covers. These risks include death, disability, illness, unemployment, retirement, changes in family structure, and health-care cost changes. While the design and delivery of benefits seeks to respond to these population risks appropriately, by taking on these responsibilities the institution itself becomes responsible for managing certain risks. The assessment and treatment of risk seeks to ensure that the risks the institution takes on are understood and assessed, but also that due consideration is given to the transfer and sharing of risk and the reduction of risk that is retained. Effective risk management seeks to ensure an appropriate split between the transfer, reduction and retention of risk.