1.Many insurers today adopt Basel definitions (e.g. controls, IT, fraud etc.) but they might not be applied in the same way across industry.
2. Operational risk data restrictions and limitations hinder its known true loss distribution.
ASSUMPTIONS & JUDGEMENT
1. How dependency assumptions and diversification benefit is justified given the scarcity of information and the degree of expert judgement applied should become a contentious area of regulatory focus.
2.scenario assessment can provide additional evidence to support the quantification of these risks but these do not provide a true and necessarily fair view of the risk profile.
3. Unquantified uncertainty around operational risks can be appropriately catered for just as is the case with other risk categories.
AREAS TO CONSIDER
1. There are a number of short-term measures and areas insurers should consider.
2.Risk Definition/Identification: The sizeable proportion of losses attributable to insurance, market, credit or liquidity risk are often better placed in the operational risk category but restrictive definitions and/or understanding doesn’t support this.
3. Internal model process Firms: Justification of operational risk diversification is tough with the regulators and so be explicit and ensure appropriately evidence any diversification either between operational loss types or between operational risk and other risk categories.
4. Drivers: Actuaries and Risk Managers have a very significant role to play in ensuring that the frequency and severity of risk are well documented and appropriately understood.
5. Collecting the data: There are numerous sources of internal and external (including industry) information available – all of which will, over time, enable the effective construction of the organisations’ operational loss distribution. The more internal intelligence on operational risk performance, the more weight & credibility we can assign to it.
6. Risk Framework: Challenge and ensure it is regularly reviewed. The Board should set the tone to support deep and broad operational risk understanding and management.
COMMENTS
1. Operational risk both its definition and modelling has presented some challenges for the insurance industry and for actuaries/risk professionals.
2. We need to develop enhancements to assess techniques and pay attention to this important area.
