mariano selvaggi
TRANSCRIPT
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Internal Modelling of Operational
e ra an s n erna ona pera ona sConference, 12-14 May 2010
www.abioric.com
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Agenda
Operational risk under Solvency II
Challen es of internal modellin
How ORIC fits in
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Solvency II: principle-based regulatory themes
PILLAR 1
uantitative
PILLAR 2
Su ervisor activities and
PILLAR 3
Re ortin
requirements
internal risk governance and disclosure
Risk-based capitalre uirements
Identification of risks notca tured under Pillar 1
Improve private and publicrisk disclosure
MCR
Supervisory review
Market-consistent valuation
: s an ar approacversus internal modelling
s ou cover rsidentification, measurement,management, reporting andmonitoring
ore ransparency rmsrisk profile & managementpractices)
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20102010 20112011 20122012
Level 2Level 2implementingimplementing
measuresmeasures
Level 2Level 2implementingimplementing
measuresmeasures
2009 June 10
ECs draft proposals for level 2
October - November
Adoption of L2 by EC
H2 2011
Final discussions inCouncil and Parliament
QuantitativeQuantitativeImpact StudyImpact Study
(QIS) 5(QIS) 5
QuantitativeQuantitativeImpact StudyImpact Study
(QIS) 5(QIS) 5
Feb - Mar
Draft QIS 5
Early May
Deadline for
comments
July - October
QIS 5Q1 2011
QIS results
UKs IMAPUKs IMAPprocessprocess
UKs IMAPUKs IMAPprocessprocess
Apri l - October
Entry into FSAs pre-application process
A ri l 2010 H2 2011
H2 2011 - H2 2012
Application review
IM application process runs
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Operational risk in Solvency II
Operational risk included in the SCR (arts 101, 103)
Definition: inadequate or failed internal processes, orfrom personnel and systems, or from external events
.
Includes legal but excludes strategic and reputational.
Outsourcing viewed as a potentially major source ofopera ona azar s ar .
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Standard Formula approach
9 Key features of the SII Level 1 text
SCR for operational risk depends on volume,
Technical rovisions
Earned premiums
Expenses related to unit-linked business
Also, Capital charge capped at a % of Basic SCR
100% correlation with other risks (no divers. benefits)
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Standard SCR
Life Ca ed Ex enses
PROVISIONS
Other
Non-lifeHealth
at X% ofBSCR unit-linkedbusiness
PREMIUMS
MAX of loadingfactors++
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Standard SCR: technical provisions
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Standard SCR: premiums
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Standard SCR: other factors
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Internal modelling approach
9 FSAs Internal Model Approval Process (IMAP)
or - erm ac ons
Firms who aim at IM encouraged to do QIS5
-
Optional process; note not pre-approval process
If IM is rejected, firm reverts to standard SCR
IM is tool to better understand firms risk profile criteria:
,
Timeline, methodology, tests, statistical quality, documentation
Model governance, change policy (for full and partial models)
Group issues (for complex groups)
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Pre-application timeline
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Internal model SCR
Use test
Statistical
quality
P&L
attribution
Tests and
standards
for IMA CalibrationValidation
DocumentationModel
overnance
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Challenges of oprisk modelling
Internal loss data collection understand key drivers,
Risk categorisation event classification boundary
Data consistency and quality (e.g., measurement)
Scaling of external losses / benchmarking
Root-cause analysis (key learning tool)
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OpRisk M&M
Internal
loss data
ExternalReporting,
ORM
s, e c.
Scenarios
Self-
assessments
Root cause
analysis
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Scenarios forward-looking element
Identifies and characterises33 to - riorit scenarios foroprisk in insurance
Provides industry guidelinesor requency an severtyassessments
sound scenarios programme
Anal ses behavioural biasesin SA workshops
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Loss data and scenario assessment
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Robust internal modelling
Less reliablemodelling
Less reliablemodelling
Publicly available (and some proprietary)losses
-More reliable
modellingMore reliable
modelling
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Evidence on the need for scaling
Analyses robust techniques for
scaling the size and number of
Illustrates sound approaches
the ORIC database
Size of the insurer is correlatedwith the severity and number ofoperational losses
in observed variability remainsunexplained by models roomfor im rovement
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Key exposures for benchmarking/scaling
Written Premiums
Non-financial Assets
Number of FTEs
Operating Expenses
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Illustrative ORIC benchmark report (WIP)
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Quarterly benchmark report for oprisk losses
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Example of scaling
Internal losses only Internal and scaled external losses
0.5
0.6
0.5
0.6
0.3
0.4
Probability
0.3
0.4
Probability
0
0.1
.
0.0
0.1
0.2
1 1 1 1 1 1 1 1 1
Loss amount (in natural logarithm)
Input BetaGeneral
6 810
12
14
16
18
Loss amount (in natural logarithm)
Input Lognorm
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Thank you!
For more information
Mariano Selvaggi, Head of ORIC
+44 (0)20 7216 7387
Mariano.Se vaggi@a i.org.u
www.a or c.com