Reports Outline Risk Management Study Results from University of Chile (Operational risk and the Solvency II capital aggregation formula:…

Science Letter

Reports Outline Risk Management Study Results from University of Chile (Operational risk and the Solvency II capital aggregation formula: implications of the hidden correlation assumptions)

By a News Reporter-Staff News Editor at Science Letter -- Investigators publish new report on Risk Management. According to news reporting originating from Santiago, Chile, by NewsRx correspondents, research stated, "We analyze the Solvency II standard formula (SF) for capital risk aggregation in relation to the treatment of operational risk (OR) capital. We show that the SF implicitly assumes that the correlation between OR and the other risks is very high: a situation that seems to be at odds with both the empirical evidence and the view of most industry participants."

Our news editors obtained a quote from the research from the University of Chile, "We also show that this formula, which somehow obscures the correlation assumptions, gives different insurance companies different benefits for diversification effects in relation to OR. Unfortunately, these benefits are based on the relative weights of the six basic capital components and not on any risk-related metric. Hence, contrary to what has been claimed, the SF does give diversification benefits (although minor ones) in relation to OR. Further, since the SF does not treat the correlation between OR and the other risks explicitly, it provides no incentive to gather data regarding this effect."

According to the news editors, the research concluded: "Given all these considerations, for the time being, we recommend the adoption of the well-known linear aggregation formula, using low-to-moderate correlation assumptions between OR and the other risks."

For more information on this research see: Operational risk and the Solvency II capital aggregation formula: implications of the hidden correlation assumptions. Journal of Operational Risk, 2016;11(4):23-33. Journal of Operational Risk can be contacted at: Incisive Media, Haymarket House, 28-29 Haymarket, London, SW1Y 4RX, England (see also Risk Management).

The news editors report that additional information may be obtained by contacting A. Cifuentes, University of Chile, Financial Regulat Center CREM, Santiago, Chile.

Keywords for this news article include: Santiago, Chile, South America, Risk Management, University of Chile.