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


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Contents Management Industry

  • 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


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What may be the extent of it’s impact? Management Industry

  • 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


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What is Operational Risk? Management Industry

“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


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What is the Regulatory Timeframe? Management Industry

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


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Management IndustryIntention 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


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How can you influence the Capital Charge? Management Industry

Aon Limited is a member of the General Insurance Standards Council


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Step 1 Management Industry

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


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Step 2 Management Industry

Quantification

  • Application of modelling techniques

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

5 Steps to a Risk Management Framework


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Step 3 Management Industry

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


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Step 4 Management Industry

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


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Step 5 Management Industry

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


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How may insurance assist? Management Industry

Insurance Road Map

Aon Limited is a member of the General Insurance Standards Council


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0% Management Industry

100% Hedge

Aon Limited is a member of the General Insurance Standards Council


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How may insurance assist? Management Industry

Insurance Road Map

Aon Limited is a member of the General Insurance Standards Council



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How may insurance assist? Council

Expected

Retained

Severe

Unexpected

Catastrophic

Unexpected

Aon Limited is a member of the General Insurance Standards Council


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Catastrophic Council

Unexpected

How may insurance assist?

Aon Limited is a member of the General Insurance Standards Council


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Summary Council

  • 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


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Angelos Deftereos Council

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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