Actuarial profession sets out best practice for operational risk models

In its paper to be presented at Staple Inn in London today (21 March), "Good practice guide to setting inputs for operational risk models", the Institute and Faculty of Actuaries (IFoA) Operational Risk Working Party will set out good practice for data and other inputs to operational risk models. The guidance will help firms avoid the trap of “rubbish in, rubbish out” in modelling operational risk and help them build a better picture of their exposure.

The paper will be essential reading for those implementing operational risk models for banks, insurers and other financial services firms. It reviews Basel, Solvency II and other regulatory requirements as well as existing literature on operational risk modelling.

Amongst other things, the paper concludes that firms should try to capture information on the operational risks and losses of pension schemes, asset managers, outsourcers and other third parties to which it may be exposed, even if these losses are indemnified.  This will create a fuller picture of all operational risks.

Patrick Kelliher, Chair of the IFoA Operational Risk Working Party, comments,

“From pensions and PPI mis-selling to LIBOR rigging, financial firms have suffered billions of pounds of losses from operational risk events. It is important that banks, insurers and other financial firms understand the extent of their exposure to operational risk. Modelling can help, but too often models of operational risk suffer from poor quality data. 

“The IFoA’s paper will be an essential guide for organisations in addressing the issues affecting inputs into operational risk models and outlines best practices to address these issues.”

Download the full "Good practice guide to setting inputs for operational risk models" paper here.

~ENDS~

Editorial notes:

About the Institute and Faculty of Actuaries

The Institute and Faculty of Actuaries (IFoA) is a royal chartered, not-for-profit, professional body.

Research undertaken by the IFoA is not commercial.  As a learned society, research helps us to fulfil our royal charter requirements to further actuarial science and serve the public interest. 

Actuaries provide commercial, financial and prudential advice on the management of a business’s assets and liabilities, especially where long term management and planning are critical to the success of any business venture. They also advise individuals, and advise on social and public interest issues.

Members of the IFoA have a statutory role in the supervision of pension funds and life insurance companies. They also have a statutory role to provide actuarial opinions for managing agents at Lloyd’s.

Members are governed by the Institute and Faculty of Actuaries. A rigorous examination system is supported by a programme of continuing professional development and a professional code of conduct supports high standards reflecting the significant role of actuaries in society.

The IFoA is available to provide independent expert comment to the media on a range of actuarial- related issues, including enterprise risk management, finance and investment, general insurance, health and care, life assurance, mortality, and pensions.