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Future developments

Ultimately the Crown faces the consequences of the quality of risk management and needs to have confidence in agency risk policies. While the overall focus on risk management across government as a whole appears to be adequate, there are opportunities to improve on current arrangements through more coordination in Crown risk management.

Improved coordinated, aggregated risk information

Because most risk management decision making is the primary responsibility of individual entities, there has been no systematic coordinated collection of specific agency risk information. This could have significant implications for cost effective and appropriate risk management from a whole of Crown perspective.

The current risk management framework could be improved through increased sharing of agency risk information. This would assist in determining overall Crown risk exposure and allow for identification of potential action.

An enhanced understanding of risk could support government objectives by increasing resilience. It could also support policy development and lead to a better understanding of the possible impacts of, and risk management techniques for, high-impact-low-probability events such as earthquakes. For example, understanding Crown risk is helpful when looking at how to best structure the core Crown debt portfolio.

Better policy decision making to manage implicit risks

Events in other countries through the global financial crisis and the experience with AMI Insurance and cost sharing arrangements post Canterbury earthquakes highlight the importance of appropriate policy settings in supporting efficient and effective risk management. In particular, the ability of the Crown to manage the implications of large scale events is critical.

Further policy development to support risk management and ensure that appropriate incentives are in place and that costs are borne appropriately is needed.

Better risk pooling

The current model for individual agency risk management means agencies manage risk without consideration of others. Risk pooling would allow diversification benefits to be captured and could potentially reduce costs.

This can be achieved by transferring risk to a central hub, which could then be managed on a consolidated basis. This is a model utilised by many private sector organisations and some other governments. Risk transfer would occur on a commercial arm's length basis and it would remain the responsibility of agencies to make their risk management decisions, thus maintaining accountability.

Risks most fit for pooling are those that can be contracted easily, have similar characteristics, and are easily understood. Arrangements may only apply to agencies where risk management is not core business.[53] This approach currently occurs to an extent within the Crown, as some government agencies voluntarily transact foreign exchange risk with the NZDMO.

Better risk appetite guidance

Agencies' individual risk affects the Crown, so risk appetite guidance is needed. While expectations are set with respect to certain risks and agencies, the approach could be more holistic and comprehensive.

With the growth in financial assets forecast in the future, the contribution to total risk from the financial component of the balance sheet will continue to grow. In the future, the Crown will need to consider the level of risk it is willing to bear with respect to this activity.

Areas of focus

  • Build a fuller understanding of aggregate Crown financial risk.
  • Investigate whether efficiencies can be achieved within the current financial risk management framework.
  • Continue to develop policy to manage the Crown’s contingent and implicit liabilities to help ensure economic stability, fiscal resilience and social outcomes are maintained.

Notes

  • [53]This suggests specialised financial management entities such as the RBNZ or the CFIs would be excluded from arrangements for the pooling of financial risk.
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