Risk-based Supervision Solange Berstein Chair IOPS Technical Committee Superintendent Pension Supervisor Chile

Agenda Motivation Comparing Two Supervisory Models Working Plan Defining the Objective Supervision Process Knowledge Assessment Follow up Where are we now?

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

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

Main Changes: Comparing Two Supervisory Models Supervision by Compliance Risk Based Supervision Focus Reactive Preventive Priorities All subjects Priority to most critical and poorly evaluated areas Resorces allocation Less flexibility More flexibility Transparency Lack of knowledge of the regulator’s concerns Make explicit the mayor concerns Supervisors Orientation to verify compliance with norms Enchanced analytical capacity judgment call is required

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

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

COMMITTEE OF DIRECTORS Organization Structure of Supervisor COMMITTEE OF DIRECTORS REGULATED SYSTEMS SUPERVIZED ENTITIES SUPERINTENDENT INTENDENT OF SUPERVISION LEGAL DIVISION INTENDENT OF REGULATION LEGAL CONTROL FINALCIAL DIVISION BENEFITS DIVISION CONTROL DIVISION MEDICAL DIVISION STUDIES DIVISION CUSTOMERS SERVICE DIVISION REGULAION DIVISION IT AND ADMINISTRATION

SUPERVISORY COMMITTEE Organization Structure of Supervisor REGULATED SYSTEMS SUPERVIZED ENTITIES SUPERINTENDENT SUPERVISORY COMMITTEE INTENDENT OF SUPERVISION LEGAL DIVISION INTENDENT OF REGULATION LEGAL CONTROL FINALCIAL DIVISION BENEFITS DIVISION CONTROL DIVISION MEDICAL DIVISION STUDIES DIVISION CUSTOMERS SERVICE DIVISION REGULAION DIVISION IT AND ADMINISTRATION

Organization Structure of Supervisor SANCTIONS COMMITTEE REGULATED SYSTEMS SUPERVIZED ENTITIES SUPERINTENDENT INTENDENT OF SUPERVISION LEGAL DIVISION INTENDENT OF REGULATION LEGAL CONTROL FINALCIAL DIVISION BENEFITS DIVISION CONTROL DIVISION MEDICAL DIVISION STUDIES DIVISION CUSTOMERS SERVICE DIVISION REGULAION DIVISION IT AND ADMINISTRATION

Supervisory Process 1. Knowledge 6. Follow Up 5. Comunication Directors Committee Supervisory Committee Intendent of Supervision Financial, Control and Benefits Divisions RBS coordinator Regulation Division, Studies Division and Customers Service Division Supervisory Committee Financial, Control and Benefits Divisions 6. Follow Up 1. Knowledge 5. Comunication 2. Planification Supervisory Committee Intendent of Supervision Financial, Control and Benefits Divisions Directors Committee Legal Division 4. Documentation and Actions 3. Assessment 4. Intendent of Supervision Financial, Control and Benefits Divisions Supervisory Committee Sanctions Committee Legal Division

Knowledge The main activities and elements required are: Information gathering; Information analysis; On-site visits; Integrated information system.

Planification Risk Matrix Regular Supervision Preventive Inspection Compliance Supervision

Assessment: Significance Weights

Assessment: Industry Risk Factors

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

Communication A summary document is given to the entity with the opinion of the Supervior: Strengths and Weaknessess Global Scoring Recommendations with priorities The Superintendent and intendent of supervision meet with the board When there is a sanction this is also communicated to the entity

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.

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

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