Although the role of social security is to respond effectively to life-cycle risks of the population covered, the management, financing, administration and delivery of benefits and services supporting this role are also subject to risk. The risks inherent in what social security institutions do are multifaceted, changing and often complex. The nature of risk depends on outside trends and factors as well as how the institution carries out and monitors tasks internally.
The management of risk enables an organization to increase the likelihood of achieving its objectives and this applies equally to social security institutions. Effective risk management requires the input and involvement of specialists with an understanding of the measurement and treatment of risk and the use of appropriate methods and assumptions to analyse risk. Actuarial input is therefore increasingly important in this area. At the same time, this part is also relevant for other professionals with risk management responsibilities.
While all risks arguably have a direct or indirect financial implication for the institution, the analysis and treatment of risk is often split into those impacting the financing and design of benefits (“scheme risks”) and that have direct financial implication for the scheme, and those impacting the management of the social security institution (“operational risks”) which have more indirect, or harder to quantify, financial implications. The risk function should ensure that the management of a number of individual risks remains consistent with the overall risk management principles and considerations at an institution, system- and scheme-wide level.
This part therefore addresses these different risk issues using the framework of a risk management process. Guideline 30 sets out this framework covering the key principles underlying risk management, including the setting up of a risk management plan and considerations around the risk budget or appetite of the social security institution. The risk management process consists of three elements: the identification of risk (Guideline 31), the measurement of risk (Guideline 32) and the treatment of risk including retention or transfer (Guideline 33). The practical application of the risk management process in treating scheme risks and operational risks is then set out in Guidelines 35 and 36 respectively.
Actuaries are professionals who have extensive expertise in identifying, measuring and managing risks by applying their skill and training in mathematics, statistics and risk theory and therefore should be involved in each step of the risk management process of the social security institution.