Scenario Analysis Approach for Operational Risk in Insurance Companies

Abstract

The article deals with the possibility of calculating the required capital in insurance companies allocated to operational risk under Solvency II regulation and the aim of this article is to come up with model that can be use in insurance companies for calculating operational risk required capital. In the article were discussed and compared the frequency and severity distributions where was chosen Poisson for frequency and Lognormal for severity. For the calculation, was used only the real scenario and data from small CEE insurance company to see the effect of the three main parameters (typical impact, Worst case impact and frequency) needed for building the model for calculation 99,5% VaR by using Monte Carlo simulation. Article comes up with parameter sensitivity and/or ratio sensitivity on calculating capital. From the database arose two conclusions related to sensitivity where the first is that the impact of frequency is much higher in the interval (0;1) than above the interval to calculated capital and second conclusion is Worst case and Typical Case ratio, where we saw that if the ratio is around 150 or higher the calculated capital is increasing faster that the ration increase demonstrated on the scenario calculation.