Hostname: page-component-8448b6f56d-c47g7 Total loading time: 0 Render date: 2024-04-24T10:12:13.892Z Has data issue: false hasContentIssue false
  • English
  • Français

Quantifying Operational Risk in Life Insurance Companies. Developed by the Life Operational Risk Working Party

Published online by Cambridge University Press:  10 June 2011

N. C. Dexter ,
C. L. Ford ,
P. C. Jakhria ,
P. O. J. Kelliher ,
D. McCall ,
C. K. Mills ,
A. C. Probyn ,
P. A. Raddall  and
J. Ryan
N. C. Dexter
Affiliation:
KPMG LLP, 1 Canada Square, Canary Wharf, London E14 5AG, U.K. Tel: +44 (0)20 7311 5443; Email: nick.dexter@kpmg.co.uk
Get access Rights & Permissions [Opens in a new window]

Abstract

This paper overviews a practical approach to the assessment of operational risk in life insurance companies. It considers how actuaries, working in conjunction with risk management professionals and senior management, can develop a framework to assess the capital requirements relating to operational risk, taking into account the capital requirements of other risks and their interaction.

This paper recognises that we do not live in an ideal world, and that a lot of the data which one might want for operational risk assessment are not, and in some cases never will be, available. Consequently, the approach outlined in this paper takes into account the fact that management and assessment of operational risk is at an early stage of development in the life industry. In addition, it outlines some of the areas where development is necessary or desirable in the coming years.

There is a section on the operational risks against which it is appropriate to hold capital. As this is a new area for insurance companies, and given the governance requirements for Individual Capital Assessments, it is important to explain the results effectively to senior management. Therefore, a brief review of techniques for reporting the results of the assessment is provided.

The paper concludes with some thoughts on how operational risk management can be embedded more in the business, and then considers what future work will help develop the framework. To echo the thoughts of the authors of the general insurance paper on this topic (Tripp et al., 2004), we hope that the paper will sow seeds for the development of best practice in dealing with operational risk, and will raise the awareness and increase the interest of actuaries in this emerging topic.

This paper represents the views of the individuals in the working party, and not necessarily the views of their employers or the Actuarial Profession.

Keywords

Operational RiskRisk ManagementLife InsuranceQuantification of RiskFinancial ServicesIndividual Capital AssessmentCapital ManagementPeople Process and SystemsCurve FittingRegulations and RiskRegulatory CapitalRisk CategorisationKey Risk IndicatorsLoss DistributionsStress TestsScenario AnalysisAggregationCorrelationRisk ReportingProfessional Guidance
Type
Sessional meetings: papers and abstracts of discussions
Information
British Actuarial Journal , Volume 13 , Issue 2 , 01 July 2007 , pp. 257 - 337
Copyright
Copyright © Institute and Faculty of Actuaries 2007

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Addison, D. (2005). Death of a mis-salesman. The Actuary, July, 26-27.Google Scholar
Alexander, C. (2001). Operational risk — regulation, analysis and management.Google Scholar
BBA (1999). Operational risk management — the new frontier. British Bankers Association.Google Scholar
BBA (2002). Operational risk management — the new frontier. British Bankers Association.Google Scholar
BBA CA. Operational risk database loss categorisation. British Bankers Association, http://www.bba.org.ukGoogle Scholar
Bank for International Settlements (2003). Sound practices for the management and supervision of operational risk. Basel Committee Publications, 96, February.Google Scholar
Chaplin, M. (2003). Risk quantification techniques. The Actuary, June, 28-29.Google Scholar
Cruz, M. (2002). Modelling, measuring and hedging operational risk.Google Scholar
Doerig, H.-U. (2000). Operational risks in financial services: an old challenge in a new environment. Papper beresented to the Institut Internationale d'Etudes Bancaires, London.Google Scholar
Embrechts, P., Klüelrg, C. & Mikosch, T. (2006). Modelling of extremal events for insurance and finance. Springer-Verlag.Google Scholar
FSA (2003). The firm risk assessment framework. Financial Services Authority.Google Scholar
FSA CP 142 (2002). Operational risk systems and controls. Financial Services Authority.Google Scholar
FSA PRU (2003). Integrated prudential sourcebook — near-final text on prudential risks systems and controls. Financial Services Authority.Google Scholar
GIRO (2002). Report of the operational risks working party.Google Scholar
GIRO (2003). Operational risk: measurement or bust. Report of the working party.Google Scholar
Hall, D.C. (2002). Using a risk management maturity-level model. Software Risk, 2(4).Google Scholar
Hallock, M.et al. (2001). Measuring operational risk. Bank Accounting and Finance, 14(4).Google Scholar
Hoffman, D. (2002). Managing operational risk: 20 firmwide best practice strategies. John Wiley & Sons.Google Scholar
IRM (2002). A risk management standard. The Institute of Risk Management, ALARM (The National Forum for Risk Management in the Public Sector) and AIRMIC (The Association of Insurance and Risk Managers).Google Scholar
King, J.L. (2001). Operational risk: measurement and modelling. Wiley Finance.Google Scholar
Laycock, M.et al. (1998). Operational risks and financial institutions. Risk Publications/Arthur Andersen.Google Scholar
McDonnell, W. (2002). Managing risk: practical lessons from recent ‘failures’ of E.U. insurers. Financial Services Authority, Occasional paper 20.Google Scholar
Muermann, A. & Oktem, U. (2002). The near-miss management of operational risk. The Journal of Risk Finance, fall.CrossRefGoogle Scholar
Pyle, D.H. (1997). Bank risk management: theory. Paper presented at the Conference on Risk Management and Regulation in Banking, Jerusalem.Google Scholar
Sanders, D.E.A. (2005). The modelling of extreme events. British Actuarial Journal, 11, 519–572.CrossRefGoogle Scholar
Simons, R. (1999). How risky is your company? Harvard Business Review.Google Scholar
Tripp, M.H., Bradley, H.L., Devitt, R., Orros, G.C., Overton, G.L., Pryor, L.M. & Shaw, R.A. (2004). Quantifying operational risk in general insurance companies. British Actuarial Journal, 10, 919–1026.CrossRefGoogle Scholar