Fundamental aspects of operational risk and insurance analytics : a handbook of operational risk

942 Pages·2014·12.67 MB·English

by  Cruz

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Fundamental Aspects of
Operational Risk and
Insurance Analytics
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Fundamental Aspects of
Operational Risk and
Insurance Analytics
A Handbook of
Operational Risk
MARCELO G. CRUZ
GARETH W. PETERS
PAVEL V. SHEVCHENKO
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Copyright©2015byJohnWiley&Sons,Inc.Allrightsreserved.
PublishedbyJohnWiley&Sons,Inc.,Hoboken,NewJersey.
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LibraryofCongressCataloging-in-PublicationData:
Cruz,MarceloG.
Fundamentalaspectsofoperationalriskandinsuranceanalytics:ahandbookofoperationalrisk/MarceloG.Cruz,
GLeonardN.SternSchoolofBusiness,NewYorkUniversity,NewYork,NY,USA,GarethW.Peters,Departmentof
StatisticalScience,UniversityCollegeofLondon,London,UnitedKingdom,PavelV.Shevchenko,Divisionof
ComputationalInformatics,TheCommonwealthScientificandIndustrialResearchOrganization,Sydney,Australia.
pages cm
Includesbibliographicalreferencesandindex.
ISBN978-1-118-11839-9(hardback)
1. Operationalrisk. 2. Riskmanagement. I. Peters,GarethW.,1978– II. Shevchenko,PavelV. III. Title.
HD61.C7782014
658.15(cid:2)5–dc23
2014012662
PrintedintheUnitedStatesofAmerica.
10 9 8 7 6 5 4 3 2 1
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ToVirginiaandNicholas
MarcelG.Cruz
TomydearwifeChenMei-Peters,yourlove,patiencesupport,
andencouragementhavemadethisbookareality.Tomymother
LarainePetersforteachingmethejoyofscientificdiscovery.To
YouxiangWu,thecharityworkiscomplete,thankyouforall
yoursupport
GarethW.Peters
TomyfatherVladimirandmotherGalina
PavelV.Shevchenko
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vi
Toknow,istoknowthatyouknownothing.
Thatisthemeaningoftrueknowledge.
Socrates
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Contents
Preface xvii
Acronyms xix
List of Distributions xxi
1 OpRisk in Perspective 1
1.1 BriefHistory 1
1.2 Risk-BasedCapitalRatiosforBanks 5
1.3 TheBasicIndicatorandStandardizedApproachesforOpRisk 9
1.4 TheAdvancedMeasurementApproach 10
1.4.1 InternalMeasurementApproach 11
1.4.2 ScoreCardApproach 11
1.4.3 LossDistributionApproach 12
1.4.4 RequirementsforAMA 13
1.5 GeneralRemarksandBookStructure 16
2 OpRisk Data and Governance 17
2.1 Introduction 17
2.2 OpRiskTaxonomy 17
2.2.1 Execution,Delivery,andProcessManagement 19
2.2.2 Clients,Products,andBusinessPractices 21
2.2.3 BusinessDisruptionandSystemFailures 22
2.2.4 ExternalFrauds 23
2.2.5 InternalFraud 23
2.2.6 EmploymentPracticesandWorkplaceSafety 24
2.2.7 DamagetoPhysicalAssets 25
2.3 TheElementsoftheOpRiskFramework 25
2.3.1 InternalLossData 26
2.3.2 SettingaCollectionThresholdandPossibleImpacts 26
2.3.3 CompletenessofDatabase(Under-reportingEvents) 27
2.3.4 RecoveriesandNearMisses 27
2.3.5 TimePeriodforResolutionofOperationalLosses 28
vii
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viii Contents
2.3.6 AddingCoststoLosses 28
2.3.7 ProvisioningTreatmentofExpectedOperationalLosses 28
2.4 BusinessEnvironmentandInternalControlEnvironment
Factors(BEICFs) 29
2.4.1 RiskControlSelf-Assessment(RCSA) 29
2.4.2 KeyRiskIndicators 31
2.5 ExternalDatabases 33
2.6 ScenarioAnalysis 34
2.7 OpRiskProfileinDifferentFinancialSectors 37
2.7.1 TradingandSales 37
2.7.2 CorporateFinance 38
2.7.3 RetailBanking 38
2.7.4 Insurance 39
2.7.5 AssetManagement 40
2.7.6 RetailBrokerage 42
2.8 RiskOrganizationandGovernance 43
2.8.1 OrganizationofRiskDepartments 44
2.8.2 StructuringaFirmWidePolicy:ExampleofanOpRiskPolicy 46
2.8.3 Governance 47
3 Using OpRisk Data for Business Analysis 48
3.1 CostReductionProgramsinFinancialFirms 49
3.2 UsingOpRiskDatatoPerformBusinessAnalysis 53
3.2.1 TheRiskofLosingKeyTalents:OpRiskinHumanResources 53
3.2.2 OpRiskinSystemsDevelopmentandTransactionProcessing 54
3.3 Conclusions 58
4 Stress-Testing OpRisk Capital and the
Comprehensive Capital Analysis
and Review (CCAR) 59
4.1 TheNeedforStressingOpRiskCapitalEvenBeyond99.9% 59
4.2 ComprehensiveCapitalReviewandAnalysis(CCAR) 60
4.3 OpRiskandStressTests 68
4.4 OpRiskinCCARinPractice 70
4.5 ReverseStressTest 75
4.6 StressingOpRiskMultivariateModels—Understandingthe
RelationshipAmongInternalControlFactorsandTheirImpacton
OperationalLosses 76
5 Basic Probability Concepts in Loss
Distribution Approach 79
5.1 LossDistributionApproach 79
5.2 QuantilesandMoments 85
5.3 FrequencyDistributions 88
5.4 SeverityDistributions 89
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