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Scenario Analysis Approach for Operational Risk in Insurance Companies

Author

Listed:
  • Michal Vyskoèil

    (Faculty of Finance and Accounting University of Economics in Prague)

Abstract

The article deals with the possibility of calculating the required capital in insurance companies allocated to operational risk under Solvency II regulation and the aim of this article is to come up with model that can be use in insurance companies for calculating operational risk required capital. In the article were discussed and compared the frequency and severity distributions where was chosen Poisson for frequency and Lognormal for severity. For the calculation, was used only the real scenario and data from small CEE insurance company to see the effect of the three main parameters (typical impact, Worst case impact and frequency) needed for building the model for calculation 99,5% VaR by using Monte Carlo simulation. Article comes up with parameter sensitivity and/or ratio sensitivity on calculating capital. From the database arose two conclusions related to sensitivity where the first is that the impact of frequency is much higher in the interval (0;1) than above the interval to calculated capital and second conclusion is Worst case and Typical Case ratio, where we saw that if the ratio is around 150 or higher the calculated capital is increasing faster that the ration increase demonstrated on the scenario calculation.

Suggested Citation

  • Michal Vyskoèil, 2020. "Scenario Analysis Approach for Operational Risk in Insurance Companies," ACTA VSFS, University of Finance and Administration, vol. 14(2), pages 153-165.
    • Handle: RePEc:prf:journl:v:14:y:2020:i:2:p:153-165
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    File URL: https://www.vsfs.cz/periodika/acta-2020-2-05.pdf
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    References listed on IDEAS

    as
    1. Rosenberg, Joshua V. & Schuermann, Til, 2006. "A general approach to integrated risk management with skewed, fat-tailed risks," Journal of Financial Economics, Elsevier, vol. 79(3), pages 569-614, March.
    2. Pavel V. Shevchenko & Gareth W. Peters, 2013. "Loss Distribution Approach for Operational Risk Capital Modelling under Basel II: Combining Different Data Sources for Risk Estimation," Papers 1306.1882, arXiv.org.
    3. Kabir K. Dutta & David F. Babbel, 2014. "Scenario Analysis in the Measurement of Operational Risk Capital: A Change of Measure Approach," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 81(2), pages 303-334, June.
    4. Nadine Gatzert & Andreas Kolb, 2014. "Risk Measurement and Management of Operational Risk in Insurance Companies from an Enterprise Perspective," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 81(3), pages 683-708, September.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    operational risk; insurance; scenario analysis; distribution; sensitivity;
    All these keywords.

    JEL classification:

    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • C10 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - General

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