© 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”
© Brammertz Consulting, 2009 3Date: 19.04.23
“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
© Brammertz Consulting, 2009 5Date: 19.04.23
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
© Brammertz Consulting, 2009 6Date: 19.04.23
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
© Brammertz Consulting, 2009 7Date: 19.04.23
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
© Brammertz Consulting, 2009 8Date: 19.04.23
“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
© Brammertz Consulting, 2009 9Date: 19.04.23
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
© Brammertz Consulting, 2009 10Date: 19.04.23
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
> …
© Brammertz Consulting, 2009 11Date: 19.04.23
Risk integrationLiquidity as a parallel risk concept
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Risk integrationValue and liquidity as a parallel concept
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