Over the next 12 months, what do you expect will happen to private equity activity?
Insurers need to make a thorough assessment of potential risk and rewards, rather than viewing operational risk as a threat to their business.
We are observing a new wave of demands for the quantification of operational risk. Given the assessment of model shortcomings in the last financial crisis, there is a need to explore capital optimization through more granular and risk sensitive measurement approaches.
For insurance companies, current Solvency II requirements are triggering the development of internal operational risk models. At first glance, the less explicit requirements of Solvency II regarding methodology choice seem to be an advantage. However, the lack of insurance industry benchmarks and regulatory rules can result in lengthy and difficult-to-manage approval processes.
Operational risk extends well beyond the confines of a risk model or formula-based quantification. It encompasses a company’s business activities and is an integral part of an efficient enterprise-wide risk management framework. This paper provides an overview of the critical steps in the design, development and validation of a methodology.
Through our experience with diverse companies across the globe, we determined that most strive for a light approach and are cost-conscious in curbing the excessive operational burden of service and maintenance. This is possible by combining and leveraging existing operational risk elements into a robust modeling framework.
Insurers must assess potential risks and rewards
Here, we highlight issues for insurers that will contribute to a broader discussion of a viable approach. This will help them make a thorough assessment of potential risk and rewards, rather than viewing operational risk as a threat to their business.
As large operational risk losses continue to attract media coverage, regulatory concerns about insurance operational risk models are also on the rise. These factors are creating a new wave of demand for operational risk quantification.
The internal need for better risk management, as well as higher capital requirements from new regulatory regimes (Solvency II), are leading companies to explore the risk sensitivity inherent in their methodology and to optimize capital consumption.
Our focus here is on insurance companies. In general, they lag behind the banking industry, which has implemented operational risk quantification models to take advantage of the Basel II advanced measurement approach (AMA) framework. Regulators’ experience with Basel II AMA and Pillar II will significantly influence and shape the approach for Solvency II operational risk models.
Next >>
