General Insurance Article - IFoA sets out best practice for operational risk models

 The guidance will help firms avoid the trap of “rubbish in, rubbish out” in modelling operational risk and help them build a better picture of their exposure.

 The paper will be essential reading for those implementing operational risk models for banks, insurers and other financial services firms. It reviews Basel, Solvency II and other regulatory requirements as well as existing literature on operational risk modelling.

 Amongst other things, the paper concludes that firms should try to capture information on the operational risks and losses of pension schemes, asset managers, outsourcers and other third parties to which it may be exposed, even if these losses are indemnified. This will create a fuller picture of all operational risks.

 Patrick Kelliher, Chair of the IFoA Operational Risk Working Party, comments, “From pensions and PPI mis-selling to LIBOR rigging, financial firms have suffered billions of pounds of losses from operational risk events. It is important that banks, insurers and other financial firms understand the extent of their exposure to operational risk. Modelling can help, but too often models of operational risk suffer from poor quality data.

 “The IFoA’s paper will be an essential guide for organisations in addressing the issues affecting inputs into operational risk models and outlines best practices to address these issues.”