Survey: Financial institutions regaining confidence, but barriers to risk management remain

Regulation uncertainty, lack of risk expertise, infrastructure issues plague organisations

06 May 2010 -  Banks and insurers are increasingly optimistic and have come far in strengthening risk management. Yet, regulatory compliance may distract attention from emerging risks while the prevalence of a silo-based approach at several organisations hampers risk management at an enterprise-wide level. So finds a survey of 346 senior risk management executives in the financial services industry conducted in February 2010 by the Economist Intelligence Unit (EIU) for SAS, the leader in business analytics software and services. 

• With 75 percent of respondents confident about revenue growth and 68 percent positive on the prospects for profitability, confidence levels have doubled since the survey for last year’s EIU report. But complacency is still a risk. Respondents cite uncertainty over future regulation as the main barrier to effective risk management. For example, banks face tighter capital and liquidity buffers under proposals dubbed the “Basel 3 rules.” The demands of regulatory compliance could eclipse a risk manager’s focus on day-to-day risk management.
• Although 60 percent of respondents in the EIU survey have a clear risk strategy, many see gaps in risk expertise, which claimed three of the top four focus areas for addressing shortcomings. This is especially true for board members who need sufficient information on risk to challenge and question executive management in setting overall risk appetite. Also, report survey respondents, stress testing is the area where there is the greatest need for expertise after compliance and governance.
• Silo-based approaches to risk management still plague financial institutions. Fewer than half of respondents believe they understand how risks interact across business lines. Poor department communication hampers effective risk management. Many institutions need to strengthen risk management programs to meet more diverse and frequent reporting requirements from the board: only 47 percent say they can provide timely and relevant risk reports to their boards.
• Enterprise risk management remains a work in progress in the banking and insurance industries. A common denominator in enterprise risk management surveys over the years is the dissatisfaction with data quality and availability, a view that’s echoed in this year’s survey too. Only 39 percent of respondents believe they are effectively collecting, storing and aggregating data.  Four out of five companies surveyed are increasing investment in data quality and integrity. Over-reliance on risk models and problems with data that populate those models are judged as key failures in financial risk management.
• “Financial institutions need to respond to evolving opportunities and challenges in risk management and effect change that impacts both staff and systems across group and business lines,” said David Rogers, SAS Global Product Marketing Manager for Risk. “Progress requires an integrated risk data infrastructure with timely access, the ability to measure exposure and risk across all risk types and books of business, and incentive distribution for consistent optimisation of risk-adjusted returns throughout the organisation.”
• Additional focussed sector reports from this survey, covering insurance, retail banking and investment banking/commercial banking, are scheduled for release in June 2010.

A warning to public assistance fraudsters in Los Angeles County: There’s a new sheriff in town. LA County is using SAS Analytics to identify fraudulent activities, enhance investigations and prevent improper payments to those who would take advantage of the system. 

A 2008 data mining pilot programme in LA County achieved an 85 per cent accuracy rate in detecting collusive fraud rings, and would have resulted in a total annual savings of at least $6.8 million. Based on these promising results, in December 2009 the LA County Board of Supervisors unanimously approved a contract to use SAS to detect and prevent benefits fraud in the CalWORKs Child Care Stage 1 program. The Stage 1 program spans an eligible family’s entry into California’s welfare assistance program until the work situation and child care is stable, ideally within six months. 

The Los Angeles County Department of Public Social Services serves over 2 million customers daily and issues almost $3 billion in benefits annually. “Welfare fraud investigators and staff throughout LA County DPSS are excited to use this cutting-edge data mining technology to help reduce, detect and prosecute welfare fraud,” said DPSS Director Philip Browning. 

LA County will use the SAS Fraud Framework for Government, which can be applied to many areas of government – from detecting collusive patterns in entitlement programmes such as Medicare and Medicaid to purchase-card fraud, bid-rigging and terrorist financing. 

“This technology will be a vital tool in our effort to prevent public assistance fraud and enhance the district attorney’s fraud investigations,” said Los Angeles County Supervisor Michael D. Antonovich, who wrote the motion implementing the program in Los Angeles County. 

The SAS Fraud Framework detects suspicious activity then prioritises and routes the resulting alerts to the appropriate decision makers. It uses SAS Social Network Analysis to uncover previously hidden linkages between participants and providers engaged in fraud to facilitate the investigation, capture and display of key information pertinent to the case.

Using SAS Solutions OnDemand, SAS will host LA County’s extensive recipient data in a secure environment. This approach expedites implementation and frees up resources the county would have had to devote to additional staff and hardware. 

“SAS uses patterns and characteristics associated with fraud to create models that score recipients and child care providers on the likelihood they will commit fraud in the future,” said Manuel H. Moreno, Research Director, Chief Executive Office, Service Integration Branch. “By analysing documents related to services including welfare, health care, in-home support services and food stamps, the technology can actually prevent fraud before it occurs.” 

Based on LA County’s successful use of technology, Moreno was named one of ComputerWorld’s 2010 Premier 100 IT Leaders. 

SAS is used in all 50 states and more than 115 local governments to transform their operations to deliver the right services, at the right time, with the appropriate resources. SAS offers a wide array of data integration, business intelligence and analytics solutions, and collaborates with government to create innovative offerings tailored to specific departmental and agency goals.

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