1. Introduction
The main objective of the review is to analyse the assessment of operational risk in life insurance companies and the process to develop a framework to assess the capital requirements relating to operational risk, taking into account the capital requirements of other risks and their interaction.
2. Summary
What is Operational Risk?
? Operational Risk is one of the six risk categories in the Prudential Sourcebook (PSB), along with credit risk, market risk, liquidity risk, group risk and insurance risk.
? It is described as "the risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events".
Benefits from assessing, monitoring and controlling organisations Operational Risk exposures:
? Management can make conscious decisions about what risks they want to accept, what risks they want to eliminate or reduce and what risks they wish to transfer.
? By measuring the risks, the benefits of their actions can be monitored.
? By analysing the Operational Risk losses, trends can be identified, lessons can be learned and appropriate action can be taken.
? Management controls can be enhanced to reduce the possibility of losses.
Operational Risk CAR Challenges:
? The risks involved, and their individual circumstances and loss amounts, are potentially extremely varied and relatively infrequent in occurrence.
? Operational risks are typically long-tailed and model results can be highly sensitive to assumptions.
? Defining what an Operational Risk (OR) loss is. An OR ev ...