Companies use operational risk models to better understand the risks to their business. These models are often used by senior management for decision making, especially around regulatory and economic calculations
Considerations when building an operational risk solution
Getting senior management and decision-makers on board is key. A good solution is multi-purpose and can be used across the business. A model can help drive improvements to industry best practices by picking out correlations.
Operational Risk in Insurance
Insurance is especially aware of the benefits of working on operations risk models. In insurance operational risk means the risk of loss from failed processes, externalities or people. Insurers need to account for these risks in their models where operational risk can account for 2% to over 25% of the capital requirements an insurer must hold.
Other considerations in insurance
Companies who model by frequency and severity separately often use different distributions. Use of Monte Carlo simulations for aggregated loss outputs is a clear area of convergence. Expert judgement comes in more strongly with firms relying heavily on scenario assessment. In insurance, a working model needs to go along with good documentation to get the model approved. There is no ‘one size fits all’ method for operational risk modelling. By using Expert Models an Analyst can have a solution configured to their exact needs.