Good practice guide to setting inputs for operational risk models. (9th November 2016)

• Record Type: Journal Article
• Authors: Kelliher, P. O. J.; Acharyya, M.; Couper, A.; Grant, K.; Maguire, E.; Nicholas, P.; Smerald, C.; Stevenson, D.; Thirlwell, J.; Cantle, N.
• Is Part Of: British actuarial journal. Volume 22:Number 1(2017)
• Page Start: 68
• Page End: 108
• Publication Date: 2016-11-09
• Subjects: Internal Loss Data, -- External Loss Data, -- Scenario Analysis, -- Business Environment and Internal Control Factors (BEICFs), -- Correlations; Actuarial science -- Periodicals; Insurance, Life -- Periodicals; Periodicals; Periodicals; 368.010941
• DOI: 10.1017/S1357321716000179
• Languages: English
• ISSNs: 1357-3217

Abstract

Abstract: This paper seeks to establish good practice in setting inputs for operational risk models for banks, insurers and other financial service firms. It reviews Basel, Solvency II and other regulatory requirements as well as publicly available literature on operational risk modelling. It recommends a combination of historic loss data and scenario analysis for modelling of individual risks, setting out issues with these data, and outlining good practice for loss data collection and scenario analysis. It recommends the use of expert judgement for setting correlations, and addresses information requirements for risk mitigation allowances and capital allocation, before briefly covering Bayesian network methods for modelling operational risks.