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Operational Risk and its impact on the Fund & Investment Management Industry An Insurance Perspective. Angelos Deftereos Aon Limited 16th April 2003. Aon Limited is a member of the General Insurance Standards Council. Contents. 1. What may be the extent of its impact?

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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


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


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


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


What is the Regulatory Timeframe?

Jan 2001Second Consultative Package

End May 2001Deadline for Comments

September 2001Issue of Working Paper on Operational Risk

End October 2001Deadline for Responses to this paper

4th Quarter 2002Consultative Paper Three Issued

2003Publication on the New Accord

2006Implementation of the New Accord

Aon Limited is a member of the General Insurance Standards Council


“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


How can you influence the Capital Charge?

Aon Limited is a member of the General Insurance Standards Council


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


Step 2

Quantification

  • Application of modelling techniques

  • Enhance external benchmarking, modelling & forecasting using Aon’s OpBase database

5 Steps to a Risk Management Framework


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


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


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


How may insurance assist?

Insurance Road Map

Aon Limited is a member of the General Insurance Standards Council


0%

100% Hedge

Aon Limited is a member of the General Insurance Standards Council


How may insurance assist?

Insurance Road Map

Aon Limited is a member of the General Insurance Standards Council


Aon Limited is a member of the General Insurance Standards Council


How may insurance assist?

Expected

Retained

Severe

Unexpected

Catastrophic

Unexpected

Aon Limited is a member of the General Insurance Standards Council


Catastrophic

Unexpected

How may insurance assist?

Aon Limited is a member of the General Insurance Standards Council


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


Angelos Deftereos

Aon Professional Risks

Telephone: 0207 668 9750

email: [email protected]

Aon Limited is a member of the General Insurance Standards Council


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