Operational risk management implementation

The regulation for banks and the corresponding for insurance and surety companies establish several requirements on operational risk management. This function has been performed in the banking sector for more than a decade and its implementation required a significant investment of time and resources to have proven and mature methodologies.

Numeravi’s consultants have extensive experience in operational risk management in banks, insurance and surety companies. We offer consultancy to develop, among others, the following fundamental aspects of this function:

Development of operational risk management policies and procedures

  • Operational risks management strategy.
  • Structure for operational risks management.
  • Operational risk management policies and procedures.
  • Procedures for estimating legal risk exposure.
  • Procedure for assessing the impact of environment changes.

Identification of risks associated with operational processes

  • Operational risk matrix
  • Development of potential loss scenarios.

Definition of key risk indicators

ScoreCard of variables for monitoring operational risk, known as KRIs or risk key indicators.

Definition of tolerance levels.

Set of tolerance levels (limits of operational risks exposure), whether global, by incident or by risk key indicator.

Definition of the incident database structure.

Stablish the information that should be included in the database of operational risk incidents to be useful to address the causes of the incidents, improving processes and performing statistical analyses.

Advanced measurement approaches

Two alternatives are established in regulatory frameworks in order to calculate the capital requirement for operational risk:

  • Basic formulas (Basel II) or standard formulas (Basel II and Solvency II) that allow to easily calculate the capital requirement for operational risk, but only produce a rough measure of exposure to losses caused by this kind of risk.
  • The option to develop and implement advanced measurement approaches (Basel II) or internal models (Solvency II) that allow to calculate a capital requirement for losses caused by the particular exposure to operational risk of an institution.

 

Several mechanisms are used in advanced measurement approaches to identify and assess the relevance of the institution’s operational risks, therefore the set of identified risks is more comprehensive and the assessment of its relevance is more accurate.  Numeravi’s consultants have extensive experience in the development and implementation of these mechanisms for credit, insurance and surety companies.

In advanced measurement approaches are identified both, the risks that have already generated costs to the institution, as well as those who have the potential to cause losses and impact to its operation.

The applied models and the analysis that are carried out, combine information from different sources and with different approaches, which significantly enriches the description of operational risks. These models and analyses can be grouped into:

Statistical analysis – Based on both internal and external statistical information:

External information, whether relevant public or aggregated data from the financial sector, is used to:

  • Assess the level in which the institution is exposed to infrequent but serious losses, i.e. its exposure to catastrophic events.
  • Complement internal statistical information.

Internal information contained in the database of operational risk incidents of the institution.

Expert Judgement Assessments

They are focused on operational risks that have the potential to affect the institution, although they have not yet resulted in losses, mainly:

  • Incorporate into the risk measurement the basic factors of the environment and the institution’s internal control that, according to the experience and opinion of the personnel of the business and support departments, are considered relevant.
  • Scenario analysis, which is the exercise of assessing the severity and probability of occurrence of operational risk events, which although with low probability, could occur and caused significant losses.

Numeravi’s consultants have developed several models to estimate operational risk losses within an advance measurement approach.

These models generate adequate estimates of exposure to this kind of risk, which makes it possible to accurately determine the own resources or capital required and the necessary reserves to face the losses generated by operational risk. These models incorporate both statistical information and expert judgement assessments.

The actions of monitoring, measurement, control and mitigation of risks required for an advanced measurement model will improve the institution’s operational risk profile, reducing the probability of occurrence and/or mitigating the severity of high loss events.