<abstract xmlns="http://www.w3.org/1999/xhtml"><p>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.</p></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.

Operational risk quantification and modelling within Romanian insurance industry

The Bucharest University of Economic Studies

Proceedings of the International Conference on Business Excellence

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 3.0 License.

{"article-title":"Operational risk quantification and modelling within Romanian insurance industry"}

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...

Operational risk quantification and modelling within Romanian insurance industry

Published Online: Aug 26, 2017

Page range: 637 - 648

DOI: https://doi.org/10.1515/picbe-2017-0068

Keywords
operational risk, insurance, Frequency – Severity approach, Bayesian techniques, Scenario Analysis, Risk Accounting, risk units, ISO 27001, standard model, internal model, Solvency II, FSA regulation

© 2017 Răzvan Tudor et al., published by De Gruyter Open

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 3.0 License.

Operational risk quantification and modelling within Romanian insurance industry

Published Online: Aug 26, 2017

Page range: 637 - 648

DOI: https://doi.org/10.1515/picbe-2017-0068

Keywordsoperational risk, insurance, Frequency – Severity approach, Bayesian techniques, Scenario Analysis, Risk Accounting, risk units, ISO 27001, standard model, internal model, Solvency II, FSA regulation

© 2017 Răzvan Tudor et al., published by De Gruyter Open

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 3.0 License.

Keywords
operational risk, insurance, Frequency – Severity approach, Bayesian techniques, Scenario Analysis, Risk Accounting, risk units, ISO 27001, standard model, internal model, Solvency II, FSA regulation