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Operational risk quantification and modelling within Romanian insurance industry

Author

Listed:
  • Tudor Răzvan

    (The Bucharest University of Economic Studies, Bucharest, Romania)

  • Badea Dumitru

    (The Bucharest University of Economic Studies, Bucharest, Romania)

Abstract

This paper aims at covering and describing the shortcomings of various models used to quantify and model the operational risk within insurance industry with a particular focus on Romanian specific regulation: Norm 6/2015 concerning the operational risk issued by IT systems. While most of the local insurers are focusing on implementing the standard model to compute the Operational Risk solvency capital required, the local regulator has issued a local norm that requires to identify and assess the IT based operational risks from an ISO 27001 perspective. The challenges raised by the correlations assumed in the Standard model are substantially increased by this new regulation that requires only the identification and quantification of the IT operational risks. The solvency capital requirement stipulated by the implementation of Solvency II doesn’t recommend a model or formula on how to integrate the newly identified risks in the Operational Risk capital requirements. In this context we are going to assess the academic and practitioner’s understanding in what concerns: The Frequency-Severity approach, Bayesian estimation techniques, Scenario Analysis and Risk Accounting based on risk units, and how they could support the modelling of operational risk that are IT based. Developing an internal model only for the operational risk capital requirement proved to be, so far, costly and not necessarily beneficial for the local insurers. As the IT component will play a key role in the future of the insurance industry, the result of this analysis will provide a specific approach in operational risk modelling that can be implemented in the context of Solvency II, in a particular situation when (internal or external) operational risk databases are scarce or not available.

Suggested Citation

  • Tudor Răzvan & Badea Dumitru, 2017. "Operational risk quantification and modelling within Romanian insurance industry," Proceedings of the International Conference on Business Excellence, Sciendo, vol. 11(1), pages 637-648, July.
  • Handle: RePEc:vrs:poicbe:v:11:y:2017:i:1:p:637-648:n:68
    DOI: 10.1515/picbe-2017-0068
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    References listed on IDEAS

    as
    1. Răzvan TUDOR & Dumitru Gh. BADEA, 2016. "Operational risk assessment with Bayesian beliefs networks – successful application in other industries. New approaches that could fit Solvency 2," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania / Editura Economica, vol. 0(Special(I), pages 9-18.
    2. Neil, Martin & Fenton, Norman, 2008. "Using Bayesian networks to model the operational risk to information technology infrastructure in financial institutions," Journal of Financial Transformation, Capco Institute, vol. 22, pages 131-138.
    3. Tripp, Michael Howard & Bradley, H. L. & Devitt, R. & Orros, G. C. & Overton, G. L. & Pryor, L. M. & Shaw, R. A., 2004. "Quantifying Operational Risk in General Insurance Companies. Developed by a Giro Working Party," British Actuarial Journal, Cambridge University Press, vol. 10(5), pages 919-1012, December.
    4. Taleb, Nassim Nicholas, 2009. "Errors, robustness, and the fourth quadrant," International Journal of Forecasting, Elsevier, vol. 25(4), pages 744-759, October.
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    Cited by:

    1. CATRINA, Ersilia, 2018. "Insurance, A Guaranteed Risk Or A Risk Assumed?," MPRA Paper 87769, University Library of Munich, Germany, revised Apr 2018.
    2. Ersilia CATRINA, 2018. "Insurance, A Guaranteed Risk Or A Risk Assumed?," Junior Scientific Researcher, SC Research Publishing SRL, vol. 4(1), pages 121-133, May.

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