© Brammertz Consulting, 20091Date: 20.09.2015 Unified Financial Analysis Risk & Finance Lab Chapter 12: Operational risk Willi Brammertz / Ioannis Akkizidis.

© Brammertz Consulting, 2009 1Date: 19.04.23

Unified Financial AnalysisRisk & Finance Lab

Chapter 12: Operational risk

Willi Brammertz / Ioannis Akkizidis

© Brammertz Consulting, 2009 2Date: 19.04.23

Operational risk is special “animal”

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“Operational” OR

Operational

Risk

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Features of the “operational part” of OR

> 80% or more of OR systems are concerned with operational part

> Operational part =

> Work-flow support (reminding people on tasks and controlling it)

> In other words: classical management job

> To dedicate 80+% on this task makes much sense

> Avoiding risk in the operational sphere pays much more than just managing it

> Much higher practical relevance of this task than risk management proper which stands on rather shaky theoretical grounds

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OR and cost

> OR is closed to real operation

> Basically outside the classical financial part with is main topic of this lecture

> OR closely related to the concept of cost as discussed in chapter 7

> OR proper needs dynamic simulation as discussed in part IV

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OR in practiceDesign Framework

GLOBAL DATA MANAGEMENT

Org. ▪ Security ▪ Audit ▪ Workflow ▪ Rating ▪ Risk, Process, Product Structures ▪ Interfaces

GLOBAL DATA MANAGEMENT

Org. ▪ Security ▪ Audit ▪ Workflow ▪ Rating ▪ Risk, Process, Product Structures ▪ Interfaces

Dashboards / ReportsGRC – ERM – ICS – ORM

Dashboards / ReportsGRC – ERM – ICS – ORM

Independent Database (J2EE), Independent HardwareIndependent Database (J2EE), Independent Hardware

DATA COLLECTIONRisks, Losses

Events, Hazards

DATA COLLECTIONRisks, Losses

Events, Hazards

QUANTIFICATIONCapital Charge (Basel II AMA, FSA, Solvency II), ERM Risk Measures

QUANTIFICATIONCapital Charge (Basel II AMA, FSA, Solvency II), ERM Risk Measures

ASSESSMENT Risks, Controls, Audit, Processes

ASSESSMENT Risks, Controls, Audit, Processes

KEY INDICATORSRisks, Controls

Performance

KEY INDICATORSRisks, Controls

Performance

ACTION MGMTvia Plans, Tasks

Issues, Risk, Control

ACTION MGMTvia Plans, Tasks

Issues, Risk, Control

DOCUMENT STOREProcedures, Policies, Guidelines (Management via Action Tracking)

DOCUMENT STOREProcedures, Policies, Guidelines (Management via Action Tracking)

Built-in load utilities

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Example of operational part of OR

April 19, 2023, Slide 7

Unit Manager Employee

Identify Risk and define Action Plan and Activity to Mitigate

Risk

Assign Activity to

Responsible person

Scenario RiskMap

Action Paln

Activities to plan

Listing of Open

Activities Accept and Start

performance of Activity.

Individual Action Item

Confirm Completion

when finished with Activity

Performance MonitoringAccept or Reject

Completion and Monitor Result

OK

Risk Manager

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“Risk part” of OR

> What cannot be covered by the operational part falls into this category

> Techniques applied are partially comparable to market and credit risk, but

> Weak statistical basis (each firm is a single case)

> Due to the strong relation to cost: needs dynamic simulation technique

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Relationship between OR and non-life insurance

> OR is nothing else than a non-life insurance case

> Many OR event types (defined by Basel) are actually insurable

> Damage to physical assets

> Fire

> Natural disaster

> …

> Theft

> …

> OR must be controlled via frequency severity (like non-life)

> OR needs dynamic analysis to be modeled properly

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Self insurance and captives

> A good way to define the risk part of OR: Self insured non-life risk

> Classical OR is covered by the running P&L

> Large firms often build captives for self insurance

> Captive: Internal insurance company (strictly separated)

> Gets all the tax benefits of an insurance company

> Examples of captives

> Large car producers insure their fleet internally

> Large firms have an internal life insurance

> …

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Risk integrationLiquidity as a parallel risk concept

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Risk integrationValue and liquidity as a parallel concept

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