Three Lines of Defense Part 3

"Three Lines of Defense," Part 3

Presenter 3: Bogie Ozdemir
Implementing 3LD Model in Insurance Companies

Need to clearly define the line between the first line and second line. Second line needs to have no gaps and no overlaps, e.g., between actuarial, legal, HR, etc.

Example: credit risk management
First line: business group CEO and delegates, investments, ALM, and Hedging
Second line: business group risk officers, Chief Market Risk Office, back offic

Example: actuarial function
Not clear between 1st and 2nd line. Who is responsible for what between the actuarial function and the risk function? In his company, the Chief Actuary reports to the CRO

In general, there is no fully implemented 3LD that he's aware of.

One interesting thing he mentioned is that his company has a model validation unit, separate from the people who create the models. He also discussed the need for subject-level experts in this control/review process.

Apparently there's a debate as to whether 3LD applies to the finance department or not. Of course, ORSA is a second-line response, and finance plays a key role in ORSA.

Overall, he characterizes 3LD as a capital-optimization problem: capital is allocated by the 2nd line, risk is taken by the first line. The trick is to coordinate the two such that shareholder value is maximized.

End Part 3.