Bank of Montreal 2013 Annual Report Download - page 84

Process Risk Assessment (PRA)
The PRA provides a deeper focus on identifying key risks and controls in
specific business processes. The PRA enables a greater understanding of
our key processes to facilitate more effective oversight and to ensure
risks are appropriately mitigated.
Key Risk Indicators (KRIs)
KRIs provide an early indication of any adverse changes in risk exposure.
Operating groups and Corporate Support areas identify metrics related to
their material risks. These KRIs are used to monitor operational risk
profiles and their overall relation to our risk appetite and are linked to
thresholds that trigger management action.
Event Data Collection and Analysis
Internal loss data serves as an important means of assessing our opera-
tional risk exposure and identifying opportunities for future risk pre-
vention measures. Under this process, internal loss data is analyzed and
benchmarked against external data. Material trends are regularly
reported to the ORC, RMC and board RRC committees to ensure pre-
ventative and corrective action can be taken where appropriate. BMO is
a member of the Operational Riskdata eXchange Association and the
American Bankers Association, international and national associations of
banks, respectively, that share loss data information anonymously to
assist in risk identification, assessment and modelling.
Capital Quantification
BMO uses The Standardized Approach (TSA) to determine Basel II regulatory
capital requirements for operational risk. We have implemented TSA proc-
esses and capital measures at both the consolidated enterprise and appli-
cable legal entity levels. BMO has also developed a risk-sensitive capital
model that is compliant with the Basel II Advanced Measurement Approach
(AMA) requirements and can calculate AMA capital in parallel with TSA
capital. BMO is currently moving ahead with its AMA application, consistent
with regulatory guidelines and expectations.
Stress Testing and Scenario Analysis
Stress testing measures the potential impact of plausible operational,
economic, market and credit events on our operations and capital.
Scenario analysis provides management with a better understanding of
low-frequency, high-severity events and assesses enterprise prepared-
ness for events that could create risks that exceed our risk appetite.
Under the AMA, we use scenario analysis for stress testing, to manage
tail risk exposure to such events and to validate operational risk
capital adequacy.
Reporting
Regular analysis and reporting of our enterprise operational risk profile
to the ORC, RMC and RRC committees are important elements of our
ORMF. A critical aspect of this reporting is the quality of our underlying
sources and systems. Timely and comprehensive operational risk
reporting enhances risk transparency and facilitates the proactive
management of material and emerging operational risk exposures.
Training
BMO’s operational risk management training program ensures
employees are qualified and equipped to execute the ORMF strategy
consistently, effectively and efficiently.
Business Continuity Management
Effective business continuity management ensures that we have the
capability to sustain, manage and recover critical operations and proc-
esses in the event of a business disruption, thereby minimizing any
adverse effects on our customers and other stakeholders.
Corporate Insurance Program
BMO’s Corporate Risk & Insurance team provides a second level of
mitigation for certain operational risk exposures. We purchase insurance
in amounts that are expected to provide adequate protection against
unexpected material loss and where insurance is required by law, regu-
lation or contractual agreement.
MD&A
Insurance Risk
Insurance risk is the risk of loss due to actual experience being
different from that assumed when an insurance product was
designed and priced. It generally entails inherent unpredictability
that can arise from assuming long-term policy liabilities or from the
uncertainty of future events. Insurance risk exists in all our insurance
products, including annuities and life, accident and sickness, and
creditor insurance, as well as in our reinsurance business.
Insurance risk consists of:
‰ Claims risk – The risk that the actual magnitude or frequency of claims
will differ from the levels assumed in the pricing or underwriting
process, including risks such as mortality risk, morbidity risk, longevity
risk and catastrophe risk;
‰ Policyholder behaviour risk – The risk that the behaviour of policy-
holders relating to premium payments, withdrawals or loans, policy
lapses and surrenders and other voluntary terminations will differ
from the behaviour assumed in the pricing calculations; and
‰ Expense risk – The risk that actual expenses associated with acquiring
and administering policies and claims processing will exceed the
expenses assumed in the pricing calculations.
Insurance risk approval authority is delegated by BMO’s Board of Direc-
tors to senior management. A robust product approval process is a
cornerstone for identifying, assessing and mitigating risks associated
with new insurance products or changes to existing products. This proc-
ess, combined with guidelines and practices for underwriting and claims
management, promotes the effective identification, measurement and
management of insurance risk. Reinsurance, which involves transactions
that transfer insurance risk to independent reinsurance companies, is
also used to manage our exposure to insurance risk by diversifying risk
and limiting claims.
Insurance risk is monitored on a regular basis. Actuarial liabilities are
estimates of the amounts required to meet insurance obligations. Liabilities
are established in accordance with the standards of practice of the Canadian
Institute of Actuaries and the Canadian Institute of Chartered Accountants.
The liabilities are validated through extensive internal and external reviews
and audits. Assumptions underlying actuarial liabilities are regularly
updated to reflect emerging actual experience. The Appointed Actuaries of
our insurance subsidiaries are appointed by those subsidiaries’ boards of
directors and have statutory responsibility for providing opinions on the
adequacy of provisions for the policyholder liabilities, the solvency of the
insurance companies and fairness of treatment of participating policy-
holders. In addition, the work of each Appointed Actuary is subject to an
external, independent review by a qualified actuary every three years, in
accordance with OSFI Guideline E-15.
BMO’s Board of Directors establishes approval authorities and limits
and delegates these to the management teams of the insurance sub-
sidiaries. The boards of directors of our insurance subsidiaries are
responsible for the stewardship of their respective insurance companies.
Through oversight and monitoring, the boards are responsible for
determining that the insurance companies are managed and function in
accordance with established insurance strategies and policies. ERPM is
responsible for providing risk management direction and independent
oversight to these insurance companies. This group also has the
authority to approve activities that exceed the authorities and limits
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