The dynamics of operational loss clustering

This paper investigates the characteristics of the operational loss data formation mechanism that takes place between the date of discovery of a new operational risk event and the final settlement date on which all losses are materialized. The first loss that characterizes the initial impact of a new operational risk event frequently triggers a sequence of related losses. Then, losses generated by the same event are not independent and follow a predictable scheme and the frequency of secondary losses is not homogeneous: both are functions of the initial loss amount and time. We model the arrival intensity and loss severities with a shot-noise stochastic process and derive its key properties. We then discuss implications of our model for the estimation of the regulatory capital charge for operational risk. In an empirical analysis, we find strong evidence of a shot-noise behavior in operational losses using the data of a major US commercial bank.     

The impact of enterprise risk management on the marginal cost of reducing risk: Evidence from the insurance industry

We test the hypothesis that practicing enterprise risk management (ERM) reduces firms’ cost of reducing risk. Adoption of ERM represents a radical paradigm shift from the traditional method of managing risks individually to managing risks collectively allowing ERM-adopting firms to better recognize natural hedges, prioritize hedging activities towards the risks that contribute most to the total risk of the firm, and optimize the evaluation and selection of available hedging instruments. We hypothesize that these advantages allow ERM-adopting firms to produce greater risk reduction per dollar spent. Our hypothesis further predicts that, after implementing ERM, firms experience profit maximizing incentives to lower risk. Consistent with this hypothesis, we find that firms adopting ERM experience a reduction in stock return volatility. We also find that the reduction in return volatility for ERM-adopting firms becomes stronger over time. Further, we find that operating profits per unit of risk (ROA/return volatility) increase post ERM adoption.     

The welfare cost of unpriced heterogeneity in insurance markets

We consider the welfare loss of unpriced heterogeneity in insurance markets, which results when private information or regulatory constraints prevent insurance companies to set premiums reflecting expected costs. We propose a methodology which uses survey data to measure this welfare loss. After identifying some “types” which determine expected risk and insurance demand, we derive the key factors defining the demand and cost functions in each market induced by these unobservable types. These are used to quantify the efficiency costs of unpriced heterogeneity. We apply our methods to the US Long‐Term Care and Medigap insurance markets, where we find that unpriced heterogeneity causes substantial inefficiency.     

Macroenvironmental determinants of operational loss severity

We investigate the relationships between the severity of operational loss events reported in the banking sector and various regulatory, legal, geographical, and economic indicators. Based on a data sample of over 57,000 losses incurred in more than 130 countries reported by the Operational Riskdata eXchange (ORX) consortium, we identify the most relevant exposure indicators for losses in four Basel II event categories: Internal Fraud; External Fraud; Employment Practices and Workplace Safety; and Clients, Products and Business Practices. We find evidence of significant correlations between Internal Fraud and constraints on executive power and the prevalence of insider trading. Clients, Products and Business Practices losses are significantly related to securities and shareholder protection laws, restrictions on banking activity, supervisory power, and the prevalence of insider trading. Other event types are sensitive to per-capita GDP and a governance index.     

Multivariate models for operational risk

Böcker and Klüppelberg [Risk Mag., 2005, December, 90–93] presented a simple approximation of OpVaR of a single operational risk cell. The present paper derives approximations of similar quality and simplicity for the multivariate problem. Our approach is based on the modelling of the dependence structure of different cells via the new concept of a Lévy copula.     

警惕个人住房贷款业务中的操作风险

信用风险和市场风险早已为人们熟识,操作风险作为一种被忽视的风险类型正日益受到重视.个人住房贷款业务作为当前银行资产业务的新支柱得到了蓬勃发展.这一正在成长的新业务,面临不少新的风险.本文试图对个人住房贷款业务中隐含的操作风险进行剖析,并探讨如何采取有效的措施加以防范.     

The interplay between risk adjustment and risk rating in voluntary health insurance

Many regulated health insurance markets include risk adjustment (aka risk equalization) to mitigate selection incentives for insurers. Empirical studies on the design and evaluation of risk-adjustment algorithms typically focus on mandatory health insurance schemes. This paper considers risk adjustment in the context of voluntary health insurance, as found in Chile, Ireland, and Australia. In addition to the challenge of mitigating selection by insurers, regulators of these voluntary schemes have to deal with selection by consumers in and out of the market. A strategy for mitigating selection by consumers is to apply some form of risk rating. Our paper shows how risk adjustment and risk rating interact: (1) risk rating reduces the need for risk adjustment and (2) risk adjustment reduces premium variation across rating factors, thereby increasing incentives for consumers to select in and out of the market.     

为客户降低保险成本提供“一个窗口”全面服务——访中国出口信用保险公司总经理唐若昕

党的十七大报告指出：“加快转变经济发展方式”、“统筹城乡发展”、“健全社会信用体系”、“拓展对外开放广度和深度”。中国出口信用保险公司（以下简称“中国信保”）履行政策性职能，认真贯彻党的十七大提出的各项要求，强化信用保险对我国经济发展的保障作用，全面推行“一个窗口”服务模式，努力提高信用保险的覆盖水平，不仅提升了自身的市场化运营水平，而且使信用保险服务更加满足市场的需要，贴近客户的需求。中国信保总经理唐若昕就“一个窗口”服务客户接受了记者专访。     

The cost of market power in banking: Social welfare loss vs. cost inefficiency

This paper analyses the relationship between market power in the loan and deposit markets and efficiency in the EU-15 countries over 1993–2002. Results show the existence of a positive relationship between market power and cost X-efficiency, allowing rejection of the so-called quiet life hypothesis [Berger, A.N., Hannan, T.H., 1998. The efficiency cost of market power in the banking industry: A test of the ‘quiet life’ and related hypotheses. Review of Economics and Statistics 8 (3), 454–465]. The social welfare loss attributable to market power in 2002 represented 0.54% of the GDP of the EU-15. Results show that the welfare gains associated with a reduction of market power are greater than the loss of bank cost efficiency, showing the importance of economic policy measures aimed at removing the barriers to outside competition.     

Micro-level stochastic loss reserving for general insurance

The vast literature on stochastic loss reserving concentrates on data aggregated in run-off triangles. However, a triangle is a summary of an underlying data-set with the development of individual claims. We refer to this data-set as ‘micro-level’ data. Using the framework of Position Dependent Marked Poisson Processes) and statistical tools for recurrent events, a data-set is analyzed with liability claims from a European insurance company. We use detailed information of the time of occurrence of the claim, the delay between occurrence and reporting to the insurance company, the occurrences of payments and their sizes, and the final settlement. Our specifications are (semi)parametric and our approach is likelihood based. We calibrate our model to historical data and use it to project the future development of open claims. An out-of-sample prediction exercise shows that we obtain detailed and valuable reserve calculations. For the case study developed in this paper, the micro-level model outperforms the results obtained with traditional loss reserving methods for aggregate data.     

Considerations of cost trade-offs in insurance solvency surveillance policy

We propose a process for identifying potentially insolvent insurers on a cost-effective basis. A loss cost function is developed such that the effectiveness of monitoring is maximized relative to a cost constraint. The loss cost function is supported by a model that provides a rank ordering of financial institutions according to their probability of insolvency. When tested against a full sample of property-liability insurance companies , the procedure provides information critical to maximizing the effectiveness of regulatory resources available for solvency surveillance and performs well as a predictor of insolvency. Likewise, the rank ordering of insurers overcomes an estimation problem critical to establishing risk-adjusted guaranty assessments.     

Information asymmetry around operational risk announcements

Operational risk incidences are likely to increase the degree of information asymmetry between firms and investors. We analyze operational risk disclosures by US financial firms during 1995–2009 and their impact on different measures of information asymmetry in the firms’ equity markets. Effective spreads and the price impact of trades are shown to increase around the first announcements of such events and to revert after the announcement of their settlement. This is especially pronounced for internal fraud and business practices related events. Market makers respond to higher information risk around the first press cutting date by increasing the quoted depth to accommodate an increase in trading volumes.The degree of information asymmetry around operational risk events may be influenced by the bank’s risk management function and the bank’s governance structure. We indeed find that information asymmetry increases more strongly after events’ first announcements when firms have weaker governance structures—lower board independence ratios, lower equity incentives of executive directors, and lower levels of institutional ownership. In contrast, the firms’ risk management function has little to no impact on information asymmetry. We interpret this as evidence that the risk management function is primarily driven by regulatory compliance needs. The results of this study contribute to our understanding of information asymmetry around operational risk announcements. They help to shed light on the role that regulation and corporate governance can play in order to establish effective disclosure practices and to promote a liquid and transparent securities market.     

The market value impact of operational loss events for US banks and insurers

This paper conducts an event study analysis of the impact of operational loss events on the market values of banks and insurance companies, using the OpVar database. We focus on financial institutions because of the increased market and regulatory scrutiny of operational losses in these industries. The analysis covers all publicly reported banking and insurance operational risk events affecting publicly traded US institutions from 1978 to 2003 that caused operational losses of at least $10 million – a total of 403 bank events and 89 insurance company events. The results reveal a strong, statistically significant negative stock price reaction to announcements of operational loss events. On average, the market value response is larger for insurers than for banks. Moreover, the market value loss significantly exceeds the amount of the operational loss reported, implying that such losses convey adverse implications about future cash flows. Losses are proportionately larger for institutions with higher Tobin’s Q ratios, implying that operational loss events are more costly in market value terms for firms with strong growth prospects.     

A rating model for loss of profits insurance

Abstract

In this paper we present a rating model for loss of profits insurance for a production system consisting of n production units. Explicit expressions for the company's long run expected average claims expenditures are derived. A numerical example is given.     

The risk implications of insurance securitization: The case of catastrophe bonds

Catastrophe (Cat) bonds are insurance securitization vehicles which are supposed to transfer catastrophe-related underwriting risk from issuers to capital markets. This paper addresses key, unanswered questions concerning Cat bonds and offers the following results. First, our findings show firms that issue Cat bonds exhibit less risky underwriting portfolios with less exposure to catastrophe risks and overall less need to hedge catastrophe risk. These results show that the access to the market for insurance securitization is easiest for firms with less risky portfolios. Second, firms that issue Cat bonds are found to experience a reduction in their default risk relative to non-issuing firms and our results, therefore, demonstrate that Cat bonds provide effective catastrophe hedging for issuing firms. Third, firms with less catastrophe exposure, increase their catastrophe exposure following an issue. Therefore, our paper cautions that the ability to hedge catastrophe risk causes some firms to seek additional catastrophe risk.     

论经营风险分析的审计意义

经营风险与财务报表重大错报风险之间存在高度的相关性。经营风险是指企业外部环境与内部环境对企业目标的实现产生不利影响的可能性。为了应对     

投资收益、经营效率和寿险企业市场绩效

中国寿险业的垄断型市场结构并没有造成垄断企业控制市场以获得超额利润的情况。本文选取中国人寿、泰康人寿、新华人寿三家企业1998年～2007年间的面板数据作为样本数据,分析了我国寿险公司绩效的影响因素,认为在中国寿险业日益激烈的市场竞争下,寿险企业的利润主要来自投资收益,经营效率高的企业虽然不能因为技术效率和规模效率而获得高利润,但是可以在竞争中占有更多的市场份额。     

The pricing of deposit insurance in the presence of systematic risk

Based on the Merton (1977) put option framework, we develop a deposit insurance pricing model that incorporates asset correlations, a measurement for the systematic risk of a bank, to account for the risk of joint bank failures. Estimates from our model suggest that actuarially fair risk-based deposit insurance that considers only individual bank failure risk is underpriced, leaving insurance providers exposed to net losses. Our estimates also capture the size premium where big banks are priced with higher deposit insurance than small banks. This result is particularly relevant to the current regulatory concerns on big banks that are too-big-to-fail. Above all, our approach provides a unifying framework for integrating risk-based deposit insurance with risk-based Basel capital requirements.     

现收现付制养老保险风险量化及应对策略

现收现付制养老保险是一种代际转移的制度,其可持续发展的经济学基础为生产力、工资和人口三者的综合增长因素能够维持代际转移,从而保证人们退休后能够维持稳定的工资替代率。这三种因素的波动形成了一定的风险。如何量化和管理这些风险是本文的研究主题。本文将给出代际人口比例和代际工资比例满足的随机微分方程。基于此,考虑在给定缴费比例和工资替代率条件下,养老保险计划出现支付危机的概率分布。进而,为了寻找风险与收益的平衡,研究现收现付制养老保险的VaR。最后,利用中国的实际统计数据,对本文的理论结果给予实证阐述,并提出应对的策略。