Aon Limited is a member of the General Insurance Standards Council Angelos Deftereos Aon Limited...

Aon Limited is a member of the General Insurance Standards Council

Angelos DeftereosAon Limited

16th April 2003

Operational Risk and its impact on the Fund & Investment Management Industry

An Insurance Perspective


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


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


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 PaperJanuary 2001

Revised Working PaperSeptember 2002


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


How can you influence the Capital Charge?

“Intention is to make minimum capital requirements of Banks more risk sensitive.”

Basel II Consultative PaperJanuary 2001


How can you influence the Capital Charge?

Pillar One

Minimum Capital

Requirement

Pillar Two

Supervisory Review Process

Market Discipline

Pillar One

Minimum Capital

Requirement

Pillar Two

Supervisory Review Process

Market DisciplineReduced Capital

Requirement

5 Steps to a Risk Management Framework

Step 1Identification & 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

Step 2Quantification

Application of modelling techniques Enhance external benchmarking, modelling & forecasting using

Aon’s OpBase database


Step 3Risk profile

Identify risk appetitebenchmark peer & firms own actuarial trendsanalyse geographical factorsoverlay strategic visionaggregation issuesmarket & credit risk diversification benefits


Step 4Risk solutions

Internal solutionscaptive analysis / risk financing analysis / risk retention

InsuranceMapping availability of insurance to risks identifiedAdvise & agree appropriate retention level & limitDesign insurance programmeProvide a range of alternatives in conjunction with business goals

Capital markets Hybrids


Step 5Monitoring & updating

Assist in ensuring operational risk management strategy is implemented & maintained

Updates on operational risk market developments



How may insurance assist?Insurance Road Map

0%

OPERATIONAL RISK PROTECTION

100%Hedge

BBB

D&O

ECCP PI

Typi

cal

Non

-Fin

anci

alP

rope

rty

All

Ris

ks

Gen

eral

&O

ther

Lia

bilit

y


Insurance Road Map

How may insurance assist?


Non

-Fin

anci

alP

rope

rty

All

Ris

ks

Gen

eral

&O

ther

Lia

bilit

y

BBB

D&O

ECCP PI

Typi

cal

Org

anis

atio

nal

Liab

ility

Non

-Fin

anci

alP

rope

rty

All

Ris

ks

Gen

eral

&O

ther

Lia

bilit

y

Una

utho

rise

dTr

adin

g

BBB

D&O

ECCP

EPL

Adv

ance

d

PI

100% Hedge

0%


Insurance Road Map


0%


Pro

pert

yA

ll R

isks

Gen

eral

&O

ther

Lia

bilit

y

BBB

ECCP PI

Typi

cal

Org

anis

atio

nal

Liab

ility

Non

-Fin

anci

alP

rope

rty

All

Ris

ks

Gen

eral

&O

ther

Liab

ility

Una

utho

rise

dTr

adin

g

BBB

D&O

ECCP

EPL

Adv

ance

d

PI

ExternalFraud

PeopleRisks

TechnologyRisk

PhysicalAssets

All Risks

RelationshipRisk

Lead

ing

Edge

100%Hedge

D&O


How may insurance assist?Insurance Road Map

Org

anis

ati

on

al

Lia

bil

ity

No

n-F

ina

nci

al

Pro

pe

rty

All

Ris

ks

0%OPERATIONAL RISK PROTECTION 100%

Hedge

BB

B

D&

O

EC

CP

PI

Ty

pic

al

BB

B

D&

O

EC

CP

EP

L

Ad

van

ced

PI

ExternalFraud

PeopleRisks

TechnologyRisk

PhysicalAssets

All Risks

RelationshipRisk

Le

adin

g

Ed

ge

ExternalFraud

PeopleRisks

TechnologyRisk

Ca

pita

lPhysicalAssets

All Risks

RelationshipRiskF

utu

re

Pro

pe

rty

All

Ris

ks

Gen

era

l &

Oth

er

Lia

bil

ity

Gen

era

l &

Oth

er

Lia

bil

ity

Un

au

tho

rise

d

Tra

din

g



Severity of Loss

ExpectedRetained

Severe Unexpected

CatastrophicUnexpected




Fre

que

ncy

Severity of Loss

ExpectedRetained

Severe Unexpected


Insu

ranc

e


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


Angelos Deftereos

Aon Professional Risks

Telephone: 0207 668 9750

email: [email protected]

Aon Limited is a member of the General Insurance Standards Council Angelos Deftereos Aon Limited...

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