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- 1. Aon Limited is a member of the General Insurance Standards Council Angelos Deftereos Aon Limited 16th April 2003 Operational Risk and its impact on the Fund & Investment Management Industry An Insurance Perspective
- 2. 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
- 3. 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
- 4. 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 Paper September 2002
- 5. Aon Limited is a member of the General Insurance Standards Council 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
- 6. Aon Limited is a member of the General Insurance Standards Council How can you influence the Capital Charge? “Intention is to make minimum capital requirements of Banks more risk sensitive.” Basel II Consultative Paper January 2001
- 7. Aon Limited is a member of the General Insurance Standards Council 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 Discipline Reduced Capital Requirement
- 8. 5 Steps to a Risk Management Framework 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
- 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 Risk profile 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 Risk solutions 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. Aon Limited is a member of the General Insurance Standards Council How may insurance assist? Insurance Road Map 0% OPERATIONAL RISK PROTECTION 100% Hedge BBB D&O ECCP PI Typical Non-Financial Property AllRisks General& OtherLiability
- 14. Aon Limited is a member of the General Insurance Standards Council Insurance Road Map How may insurance assist? OPERATIONAL RISK PROTECTION Non-Financial Property AllRisks General& OtherLiability BBB D&O ECCP PI Typical Organisational Liability Non-Financial Property AllRisks General& OtherLiability Unauthorised Trading BBB D&O ECCP EPL Advanced PI 100% Hedge 0%
- 15. Aon Limited is a member of the General Insurance Standards Council Insurance Road Map How may insurance assist? 0% OPERATIONAL RISK PROTECTION Property AllRisks General& OtherLiability BBB ECCP PI Typical Organisational Liability Non-Financial Property AllRisks General& Other Liability Unauthorised Trading BBB D&O ECCP EPL Advanced PI External Fraud People Risks Technology Risk Physical Assets All Risks Relationship Risk Leading Edge 100% Hedge D&O
- 16. Aon Limited is a member of the General Insurance Standards Council How may insurance assist? Insurance Road Map Organisational Liability Non-Financial Property AllRisks 0% OPERATIONAL RISK PROTECTION 100% Hedge BBB D&O ECCP PI Typical BBB D&O ECCP EPL Advanced PI External Fraud People Risks Technology Risk Physical Assets All Risks Relationship Risk Leading Edge External Fraud People Risks Technology Risk Capital Physical Assets All Risks Relationship Risk Future Property AllRisks General& OtherLiability General& Other Liability Unauthorised Trading
- 17. Aon Limited is a member of the General Insurance Standards Council How may insurance assist? Severity of Loss Expected Retained Severe Unexpected Catastrophic Unexpected
- 18. Catastrophic Unexpected Aon Limited is a member of the General Insurance Standards Council How may insurance assist? Frequency Severity of Loss Expected Retained Severe Unexpected Catastrophic Unexpected Insurance
- 19. 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
- 20. Aon Limited is a member of the General Insurance Standards Council Angelos Deftereos Aon Professional Risks Telephone: 0207 668 9750 email: angelos.deftereos@aon.co.uk