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The Institute of Risk Management’s (IRM) Internal Model Industry Forum (IMIF) has launched a guidance booklet entitled ‘Operational risk modelling: common practices and future development’. The document was written by ORIC International and the IRM and is aimed at insurance companies.

Capital requirements in respect of operational risk could range from 5 percent to over 30 percent of the overall funds an insurer must hold, amounting to hundreds of millions of pounds for major insurers. Unsurprisingly, a more sophisticated measurement of operational risk within risk based capital models is moving up the agenda.  Yet defining a robust and value-adding process to arrive at a credible capital requirement for operational risk is no easy task.

While most of the technical aspects of capital models for insurers are now relatively well developed, industry players, regulators and boards recognise that areas of vulnerability remain, including the modelling of operational risks. Until now, the industry’s lack of consistency and definition in this area ran the risk of delivering inaccurate capital requirements.

This guidance aims to change that. It approaches operational risk in the context of insurers’ internal risk models. It examines how to validate and communicate the assumptions and techniques involved to produce a result that is understood and trusted by organisations and regulators alike. 

Michael Sicsic, chairman of ORIC International, commented:

“Operational risk management is still a relatively new discipline – and quantification appears to be the cornerstone of raising the bar for both operational risk practitioners, and more importantly for senior management in their decision-making processes. Indeed, the quantification of operational risk is a critical milestone in the journey of achieving the same maturity level in managing operational risk as is regarded to be the case in the other more established areas of enterprise risk management, such as credit, market and insurance risk.”

Read the document (PDF).

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