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

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

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...

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Bibliographic Details
Published in:British Actuarial Journal Vol. 13; no. 2; pp. 257 - 337
Main Authors: Dexter, N. C., Ford, C. L., Jakhria, P. C., Kelliher, P. O. J., McCall, D., Mills, C. K., Probyn, A. C., Raddall, P. A., Ryan, J.
Format: Journal Article
Language:English
Published: Cambridge, UK Cambridge University Press 01-07-2007
Institute of Actuaries and the Faculty of Actuaries
Subjects:
Business risks
Business structures
Capital requirements
Financial risk
Insurance regulation
Life insurance
Life insurance companies
Operating rooms
Operational risk
Risk management
Sessional meetings: papers and abstracts of discussions
Risk Reporting
Individual Capital Assessment
Professional Guidance
Curve Fitting
Correlation
Financial Services
Life Insurance
Capital Management
Regulatory Capital
Risk Management
Aggregation
Scenario Analysis
Loss Distributions
Operational Risk
Quantification of Risk
People Process and Systems
Stress Tests
Regulations and Risk
Key Risk Indicators
Risk Categorisation
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Summary: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.
ISSN:1357-3217
2044-0456
1748-5002
DOI:10.1017/S1357321700001483