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Operational Risk and its Impact on the Fund & Investment Management Industry: An Insurance Perspective

This article explores the extent of operational risk on the fund and investment management industry, with a focus on the insurance perspective. It covers topics such as the definition of operational risk, the regulatory timeframe, influencing capital charge, and how insurance can assist in managing operational risk.

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Operational Risk and its Impact on the Fund & Investment Management Industry: An Insurance Perspective

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  1. Operational Risk and its impact on the Fund & Investment Management IndustryAn Insurance Perspective Angelos Deftereos Aon Limited 16th April 2003 Aon Limited is a member of the General Insurance Standards Council

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

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

  4. 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 Paper January 2001 Revised Working PaperSeptember 2002 Aon Limited is a member of the General Insurance Standards Council

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

  6. “Intention is to make minimum capital requirements of Banks more risk sensitive.” Basel II Consultative Paper January 2001 How can you influence the Capital Charge? Aon Limited is a member of the General Insurance Standards Council

  7. How can you influence the Capital Charge? Aon Limited is a member of the General Insurance Standards Council

  8. Step 1 Identification & 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 5 Steps to a Risk Management Framework

  9. Step 2 Quantification • Application of modelling techniques • Enhance external benchmarking, modelling & forecasting using Aon’s OpBase database 5 Steps to a Risk Management Framework

  10. Step 3 Riskprofile • Identify risk appetite • benchmark peer & firms own actuarial trends • analyse geographical factors • overlay strategic vision • aggregation issues • market & credit risk diversification benefits 5 Steps to a Risk Management Framework

  11. Step 4 Risksolutions • Internal solutions • captive analysis / risk financing analysis / risk retention • Insurance • Mapping availability of insurance to risks identified • Advise & agree appropriate retention level & limit • Design insurance programme • Provide a range of alternatives in conjunction with business goals • Capital markets • Hybrids 5 Steps to a Risk Management Framework

  12. Step 5 Monitoring&updating • Assist in ensuring operational risk management strategy is implemented & maintained • Updates on operational risk market developments 5 Steps to a Risk Management Framework

  13. How may insurance assist? Insurance Road Map Aon Limited is a member of the General Insurance Standards Council

  14. 0% 100% Hedge Aon Limited is a member of the General Insurance Standards Council

  15. How may insurance assist? Insurance Road Map Aon Limited is a member of the General Insurance Standards Council

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

  17. How may insurance assist? Expected Retained Severe Unexpected Catastrophic Unexpected Aon Limited is a member of the General Insurance Standards Council

  18. Catastrophic Unexpected How may insurance assist? Aon Limited is a member of the General Insurance Standards Council

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

  20. Angelos Deftereos Aon Professional Risks Telephone: 0207 668 9750 email: angelos.deftereos@aon.co.uk Aon Limited is a member of the General Insurance Standards Council

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