Economy – Quantitative Finance – Risk Management
Scientific paper
2010-10-21
Economy
Quantitative Finance
Risk Management
Scientific paper
Under the Basel II standards, the Operational Risk (OpRisk) advanced measurement approach allows a provision for reduction of capital as a result of insurance mitigation of up to 20%. This paper studies the behaviour of different insurance policies in the context of capital reduction for a range of possible extreme loss models and insurance policy scenarios in a multi-period, multiple risk settings. A Loss Distributional Approach (LDA) for modelling of the annual loss process, involving homogeneous compound Poisson processes for the annual losses, with heavy tailed severity models comprised of alpha-stable severities is considered. There has been little analysis of such models to date and it is believed, insurance models will play more of a role in OpRisk mitigation and capital reduction in future. The first question of interest is when would it be equitable for a bank or financial institution to purchase insurance for heavy tailed OpRisk losses under different insurance policy scenarios? The second question then pertains to Solvency II and addresses what the insurers capital would be for such operational risk scenarios under different policy offerings. In addition we consider the insurers perspective with respect to fair premium as a percentage above the expected annual claim for each insurance policy. The intention being to address questions related to VaR reduction under Basel II, SCR under Solvency II and fair insurance premiums in OpRisk for different extreme loss scenarios. In the process we provide closed form solutions for the distribution of loss process and claims process in an LDA structure as well as closed form analytic solutions for the Expected Shortfall, SCR and MCR under Basel II and Solvency II. We also provide closed form analytic solutions for the annual loss distribution of multiple risks including insurance mitigation.
Byrnes Aaron D.
Peters Gareth W.
Shevchenko Pavel V.
No associations
LandOfFree
Impact of Insurance for Operational Risk: Is it worthwhile to insure or be insured for severe losses? does not yet have a rating. At this time, there are no reviews or comments for this scientific paper.
If you have personal experience with Impact of Insurance for Operational Risk: Is it worthwhile to insure or be insured for severe losses?, we encourage you to share that experience with our LandOfFree.com community. Your opinion is very important and Impact of Insurance for Operational Risk: Is it worthwhile to insure or be insured for severe losses? will most certainly appreciate the feedback.
Profile ID: LFWR-SCP-O-423168