Aligning operational risk and insurance
Institute of Risk Management cross-industry group issues guidance
to help insurance firms link operational risk and insurance purchasing
The Institute of Risk Management’s (IRM) Internal Model Industry Forum (IMIF) today publishes its ninth guidance document for the insurance market – Aligning operational risk and insurance.
The guidance was developed to help insurers better align their insurance purchase programmes with the exposure to operational risks that the firm has identified as part of its model processes. Operational risk is related to people, processes and systems and includes a wide range of potential events such as mis-selling, mis-pricing, business continuity and cyber issues. Operational loss events can have significant impact on the market value of insurers. The operational risk management framework of an insurer, which will include risk appetite setting and risk modelling, should provide direct input to decision making in respect of how much risk to transfer and what insurance coverage is required. Firms should also be able to take proper credit for robust insurance coverage when modelling exposure for regulatory purposes, providing a capital benefit.
The guidance was produced by a workstream of industry practitioners led by Philip Whittingham FIRM, Head of Model Validation and Risk Governance at XL Catlin, who is also the chair of the IMIF, and Thomas Jaeggi, Head of Operational Risk Advisory, Marsh’s Risk Consulting Practice. The work was also supported by ORIC International.
Phil Whittinghamexplained, "Our survey work demonstrated a variation in practice across the industry in aligning the management and modelling of operational risk with insurance purchasing programmes. We hope that the new guidance will help inform risk teams about best practice in this area and encourage robust, transparent and integrated approaches that will be of significant value to the business.”
Thomas Jaeggi added, "Integrating insurance into operational risk models and capital assessments can result in a variety of benefits, assuming the modelling and analysis are conducted in an appropriate manner. These benefits range from producing an economically realistic view of the firm's risk profile, to enabling consistent risk management and transfer decisions."
Caroline Coombe, ORIC International CEO, explained, 'Industry practices regarding insurance purchasing and the incorporation of insurance into operational risk capital models continue to evolve. A clear conclusion from our study is that internal and external loss data, risk control self-assessments, operational risk scenarios and, ultimately the internal model go hand in hand with loss mitigation. There is a real opportunity for firms to use insurance to help manage their risk profile and maximise capital efficiency.”
The guidance document is available from the IRM’s website at https://www.theirm.org/what-we-say/thought-leadership/creating-value-through-internal-models/
IMIF 2018 publications are generously sponsored by EY, LCP, Milliman, PWC, Risk Dynamics and Marsh.
