Data Management

Impact Of Insurance For Operational Risk: Is It Worthwhile To Insure Or Be Insured For Severe Losses?

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Executive Summary

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 different insurance policies in the context of capital reduction for a range of extreme loss models and insurance policy scenarios in a multi-period, multiple risk settings. A Loss Distributional Approach (LDA) for modeling of the annual loss process, involving homogeneous compound Poisson processes for the annual losses, with heavy-tailed severity models comprised of ?-stable severities is considered.

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