Standardized measurement approach extension to integrate insurance deduction into operational risk capital requirement

Abstract This paper aims at covering and describing the shortcomings of various models used to quantify and model the operational risk within insurance industry with a particular focus on Romanian specific regulation: Norm 6/2015 concerning the operational risk issued by IT systems. While most of the local insurers are focusing on implementing the standard model to compute the Operational Risk solvency capital required, the local regulator has issued a local norm that requires to identify and assess the IT based operational risks from an ISO 27001 perspective. The challenges raised by the correlations assumed in the Standard model are substantially increased by this new regulation that requires only the identification and quantification of the IT operational risks. The solvency capital requirement stipulated by the implementation of Solvency II doesn’t recommend a model or formula on how to integrate the newly identified risks in the Operational Risk capital requirements. In this context we are going to assess the academic and practitioner’s understanding in what concerns: The Frequency-Severity approach, Bayesian estimation techniques, Scenario Analysis and Risk Accounting based on risk units, and how they could support the modelling of operational risk that are IT based. Developing an internal model only for the operational risk capital requirement proved to be, so far, costly and not necessarily beneficial for the local insurers. As the IT component will play a key role in the future of the insurance industry, the result of this analysis will provide a specific approach in operational risk modelling that can be implemented in the context of Solvency II, in a particular situation when (internal or external) operational risk databases are scarce or not available.

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Should the advanced measurement approach be replaced with the standardized measurement approach for operational risk?

The Journal of Operational Risk ◽

10.21314/jop.2016.177 ◽

2016 ◽

Vol 11 (3) ◽

pp. 1-49 ◽

Cited By ~ 13

Author(s):

Gareth Peters ◽

Pavel Shevchenko ◽

Bertrand Hassani ◽

Ariane Chapelle

Keyword(s):

Operational Risk ◽

Standardized Measurement ◽

Measurement Approach

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The measurement of operational risk capital costs with an advanced measurement approach through the loss distribution approach (A case study in one of the Indonesia’s state-owned banks)

Competition and Cooperation in Economics and Business ◽

10.1201/9781315225227-21 ◽

2017 ◽

pp. 167-177

Author(s):

R. Hartini ◽

S. Hartoyo ◽

H. Sasongko

Keyword(s):

Operational Risk ◽

Risk Capital ◽

Loss Distribution ◽

Capital Costs ◽

Loss Distribution Approach ◽

Measurement Approach

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ANALISA PENGUKURAN BEBAN MODAL RISIKO OPERASIONAL METODE BASIC INDICATOR APPROACH (BIA) DAN ADVANCE MEASUREMENT APPROACH (AMA) DI BANK EFG

E-Mabis: Jurnal Ekonomi Manajemen dan Bisnis ◽

10.29103/e-mabis.v21i1.474 ◽

2020 ◽

Vol 21 (1) ◽

pp. 14-20

Author(s):

Edian Fahmy

Keyword(s):

Value At Risk ◽

Goodness Of Fit ◽

Geometric Distribution ◽

Operational Risk ◽

Risk Capital ◽

Loss Distribution ◽

Indicator Approach ◽

External Events ◽

Measurement Approach

This study aims to compare the magnitude of operational risk losses between the Basic Indicator Approach (BIA) method, and the loss distribution model in the Advanced Measurement Approach (AMA) approach so as to provide a more realistic picture for banks to determine the operational risk capital burden that must be provided based on the causes Operational risks are as follows Internal Process, Human and External Events. Measurement of operational risk capital burden by the AMA method is the determination of frequency of loss distribution, determination of severity of loss distribution, testing with goodness of fit test, then compilation of aggregated loss distribution, calculation of Operational Value at Risk (OpVar), testing the model with back testing and comparison of capital adequacy from the results of the calculation of the Basic Indicator Approach (BIA) and the Advance Measurement Approach (AMA). The results of research based on the BIA require an operational risk capital cost of Rp.291,652,000,000. The results of the research on the AMA approach use the frequency of loss distribution parameter for the internal causes of the process with a Geometric distribution of 0.17561, while for the human cause of 0.08511, for the cause of external events amounting to 0.83721. Determination of Frequency of Loss Distribution using Goodness of Fit for internal processes, people and external events. The results of the Operational Value at Risk (OpVar) with a geometric distribution pattern, then the maximum loss that can arise due to human factors is Rp.24,114,480,096, -, for internal process factors of Rp.6,010,929,367, whereas for external causes for Rp. 2,161,092,909. In total operational risk capital needs through the AMA method of Rp. 32,286,502,372.

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