5 Steps to a Risk Management Framework
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Operational Risk and its impact on the Fund & Investment Management Industry An Insurance Perspective Angelos Deftereos Aon Limited 16th April 2003 Aon Limited is a member of the General Insurance Standards Council Contents 1. What may be the extent of its impact? 2. What is Operational Risk? 3. How can you influence Capital Charge? 4. How may insurance assist? 5. Summary Aon Limited is a member of the General Insurance Standards Council What may be the extent of it’s impact? Study of impact on European Asset Managers Currently 13 week expenditure Impact - 20% increase for large asset managers - 60% increase for medium asset managers - ?% increase for small asset managers Source: Bank Reputation and Asset Management Industry: Professor Colin Meyer 2001 Aon Limited is a member of the General Insurance Standards Council What is Operational Risk? “The risk of loss resulting from inadequate or failed internal processes, people and systems or from external events.” Source: Basel II Consultative Paper January 2001 Revised Working Paper September 2002 Aon Limited is a member of the General Insurance Standards Council What is the Regulatory Timeframe? Jan 2001 Second Consultative Package End May 2001 Deadline for Comments September 2001 Issue of Working Paper on Operational Risk End October 2001 Deadline for Responses to this paper 4th Quarter 2002 Consultative Paper Three Issued 2003 Publication on the New Accord 2006 Implementation of the New Accord Aon Limited is a member of the General Insurance Standards Council How can you influence the Capital Charge? “Intention is to make minimum capital requirements of Banks more risk sensitive.” Basel II Consultative Paper January 2001 Aon Limited is a member of the General Insurance Standards Council How can you influence the Capital Charge? Market Discipline Reduced Capital Requirement Pillar Two Pillar Two Supervisory Review Process Market Discipline Pillar One Supervisory Pillar One Review Process Minimum Capital Minimum Capital Requirement Requirement Aon Limited is a member of the General Insurance Standards Council 5 Steps to a Risk Management Framework Step 1 Identification & Risk Mapping Setting framework for implementation - Overall Operational Risk Strategy Definition of loss Set-up & implementation of data capturing mechanisms Assist in mapping losses into agreed risk categories 5 Steps to a Risk Management Framework Step 2 Quantification Application of modelling techniques Enhance external benchmarking, modelling & forecasting using Aon’s OpBase database 5 Steps to a Risk Management Framework Step 3 Risk profile Identify risk appetite benchmark peer & firms own actuarial trends analyse geographical factors overlay strategic vision aggregation issues market & credit risk diversification benefits 5 Steps to a Risk Management Framework Step 4 Risk solutions Internal solutions captive analysis / risk financing analysis / risk retention Insurance Mapping availability of insurance to risks identified Advise & agree appropriate retention level & limit Design insurance programme Provide a range of alternatives in conjunction with business goals Capital markets Hybrids 5 Steps to a Risk Management Framework Step 5 Monitoring & updating Assist in ensuring operational risk management strategy is implemented & maintained Updates on operational risk market developments How may insurance assist? General & Other Liability Non-Financial Property All Risks D&O PI ECCP BBB Typical Insurance Road Map OPERATIONAL RISK PROTECTION 100% Hedge 0% Aon Limited is a member of the General Insurance Standards Council ECCP ECCP 0% Aon Limited is a member of the General Insurance Standards Council Non-Financial Property All Risks General & Other Liability General & Other Liability Organisational Liability Unauthorised Trading EPL D&O Non-Financial Property All Risks D&O PI BBB BBB PI Advanced Typical How may insurance assist? Insurance Road Map OPERATIONAL RISK PROTECTION 100% Hedge How may insurance assist? Non-Financial Property All Risks General & Other Liability General & Other Liability Technology Risk Property All Risks Organisational Liability Unauthorised Trading EPL D&O External Fraud D&O ECCP ECCP PI BBB BBB Physical Assets All Risks People Risks PI Advanced Relationship Risk Typical Leading Edge Insurance Road Map OPERATIONAL RISK PROTECTION 0% Aon Limited is a member of the General Insurance Standards Council 100% Hedge How may insurance assist? Aon Limited is a member of the General Insurance Standards Council Non-Financial Property All Risks General & Other Liability General & Other Liability D&O PI OPERATIONAL RISK PROTECTION Property All Risks Technology Risk Organisational Liability External Fraud Unauthorised Trading Physical Assets All Risks EPL People Risks D&O Relationship Risk PI Technology Risk ECCP External Fraud ECCP Physical Assets All Risks BBB People Risks BBB Leading Edge Typical Advanced 0% Relationship Risk Capital Future Insurance Road Map 100% Hedge How may insurance assist? Expected Retained Severe Unexpected Severity of Loss Aon Limited is a member of the General Insurance Standards Council Catastrophic Unexpected How may insurance assist? Catastrophic Unexpected Aon Limited is a member of the General Insurance Standards Council Summary Fund Management industry will be impacted by the proposed new capital charges ‘Fat tail’ risks expensive to retain on balance sheet, risk transfer more economic Insurance market working to obtain regulatory relief for its products Insurance will form a more significant part of overall operational risk management strategy for Fund and Investment Management Industry Aon Limited is a member of the General Insurance Standards Council Angelos Deftereos Aon Professional Risks Telephone: 0207 668 9750 email: angelos.deftereos@aon.co.uk Aon Limited is a member of the General Insurance Standards Council
