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Use Of Derivatives In Effective Business Risk Management
Derivatives Important Cog In Effective Business Risk Management

Use Of Derivatives In Effective Business Risk Management

Derivatives help to keep business transaction costs low in the marketplace. Derivatives also offer other benefits like bringing liquidity to the market. Money is the fluid that keeps big business marketplace moving smoothly with less interruption or obstructions to business.

Most large businesses use derivatives to manage foreign currency movement risks. In addition derivatives manage the risk from interest rate movements and to protect themselves against commodity price fluctuations.

5th February 2020 Should Financial Services Sector Diverge Away From European Union Post Brexit?

After seemingly as a whole sector arguing against Brexit many financial services leaders in London want the UK to now diverge away from some European Union EU rules so it can be more competitive around the world.

The European Union says divergence leads to restrictions on ability to do business with European Union countries yet many senior leaders in the likes of insurers are arguing fro divergence. Others say the UK needs to stay in alignment with EU rules to allow the UK to continue uninterrupted trading with the EU member states.

The UK in reality has around 6 to 11 months to decide how it leaves the EU after the end of the transition period at the end of 2020. However the EU ha smade an opening free trade talk gambit that says the UK can only have cutting edge free trade agreement if it maintains alignment with EU rules and agrees to this in writing not just in principle. It also wants the European Court of Justice to decide if the UK does step out of alignment. The UK government says it does not want tied into alignment in writing nor to be judged by EU court.

Management of risk in financial services

Are you responsible for managing risks in your financial services business?  

Poor risk management in financial institutions is self evident. Very few financial services businesses would not have had risk management systems in place prior to financial crisis in 2007 2008. However, enterprise risk management ERM is but a tool. The ERM tool is only as effective as the person or business employing it in practice.

2008 was not the last time ERM failed. The UKs biggest financial services institutions are still making mistakes that can only arise through the inadequate use of ERM principles and practices. And the result is continued loss of shareholder value loss making financial services businesses loss of jobs in financial services industry and customers who have suffered financially fatal losses.

Business risk in financial services industry is the driver of success or failure. Use an enterprise risk management ERM framework to bring about risk culture change and improve corporate governance and regulatory compliance

Our financial services business risk partners can assist you in achieving your strategic operational and project objectives whilst cost-effectively and pro actively managing your enterprise wide risk. Financial services risk management combines action on corporate governance enterprise risk management and regulatory compliance GRC.

Helping connect business leaders in the financial services industry around the world

Join together to manage financial services industry risks better. Finding the latest best the financial services industry has to offer can be time consuming or unfruitful. We make life and business in the financial services sector easier and better.

Searching for what you need to inform your business decision making is free. Come back often to find the best of the financial services industry online quickly. Pick up the latest business risk management news headlines opinions debate and business reviews.

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Risk in financial services industry in UK are varied complex and interrelated. Political economic social technological legal and environmental risks all play a part in the success or otherwise of a financial services business in the UK.

How an organisation responds to existing and emerging financial services risks will define its future business resilience and sustainability. Survival is not a given never mind success!

Recent surveys have found that people in the UK are on average not investing for their future. Business investors are concerned about the threats rather than the opportunities from Brexit.

The investment climate either creates a buying opportunity or threat to wealth depending on your view of the intermediate and long-term future of the UK and global economy.

In the UK consumers are borrowing more and continue to spend spend spend! High levels of employment and the low unemployment rate creates a level of sustainability that belies the fears of the professional investors.

Financial services industry businesses can collapse if they do not manage risks effectively

Over the years there have been many examples of financial services business leaders who have underestimated the potential effect of doing things badly.

Read articles about the business environment in the UK

Key Types of Financial Services Risks include :

  • Regulatory pressures because the cost of compliance has risen and the cost of noncompliance can be severe
  • Low interest rates because they reduce the income potential from many financial products or businesses
  • Brexit because of the loss of Passporting may have an impact on income from European Union but there is significant uncertainty on the severity of the impact.
  • Skills Gap despite worries of job losses due to Brexit there is actually a shortage of skilled workers in the financial services industry. The costs of employing people in the City of London are increasing as a result of the developing skills gap.

FinTech creates more opportunities to improve the profitability of financial service provision and allow more entrants to the marketplace to compete with traditional financial services providers.

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Understand Insurance Regulatory Framework and Requirements Including Those Under Solvency 2

Solvency 2 is a risk based system defining the capital requirements with a standard formula or an internal model or taking.

How much capital and financial resources do insurers and reinsurers need to hold to cover the risks to which they are exposed? Solvency 2 Directive came into force on 19th December 2013. There were delays before member states had to enforce Solvency 2. The Solvency regime came into force for insurers on 1st January 2016 at which time Solvency 1 regime ceased to apply.

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Insurers are obligated to take account of all types of risk which they are exposed and to manage those risks more effectively. Solvency 2 aims for a risk based solvency regime including reporting requirements in accordance to the nature scale and complexity of the insurance business.

The Solvency 2 rules also lay down the principles that should guide insurers overall risk management so they can be robust enough to cope with adverse risk events effectively including economic risks market risk and operational risk.

Solvency 2 is based on Three Pillar Framework. Pillar 1 is the minimum capital requirements. Insurers must maintain reserves against liabilities. Minimum Capital Requirement MCR the fundamental level of solvency required of any insurer. Solvency Capital Requirement SCR represents the target level of solvency which an insurer or reinsurer needs to maintain (its a risk based calculation which is made through a standard consistent formula or by using internal models or combination of both). The SCR is the capital needed by insurer considered enough after risk based assessment to cover liabilities. The holistic assessment must address the quality liquidity and profitability of the assets covering the liabilities. Insurers must meet the MCR and SCR at all times.

Pillar 2 is the supervision risk. Insurers are required to submit their own assessment of risk and solvency capital adequacy ORSA Own Risk and Solvency Assessment. Insurers need to submit details of their internal systems and controls. Supervisors may ask for addition capital to be retained if the insurers risk profile deviates significantly from the assumptions underlying the SCR. Insurers must have appropriate corporate governance and stress test their systems and procedures.

Pillar 3 public disclosure. Insurers are required to report publicly on their financial condition providing information on capital.  Insurers must follow right accounting standards and regulatory reporting rules. External ratings agencies will review insurers own assessments and arrive at appropriate conclusions. 

International Association of Insurance Supervisors IAIS is the global standard setting body for the insurance industry. It represents insurance regulators and supervisors of hundreds of jurisdictions issuing global insurance principles standards and guidance papers.

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