Aon UK Hosts Operational Risk Modeling Discussion with Bank of England

July 29, 2013

Aon UK Limited, the UK arm of Aon plc, which in addition to traditional insurance activities, also provides risk management, human resource consulting and outsourcing expertise, welcomed over 60 senior risk executives from leading banks and other financial institutions to an inaugural event focused on Operational Risk modeling.

Speakers included executives from the Bank of England, Santander, Aon and the Institute of Operational Risk. The event outlined the importance of designing and building the right risk modeling tools.

Aon said the “event fostered discussion from experts in the financial sector and focused on the next generation of operational risk modeling. It assessed the need to meet current regulatory requirements while effectively mitigating losses and identified the need for scenario analysis as a critical component of modeling.

“Operational risk leaders from across the banking sector contributed to a discussion on the relevance and potential impact of current modeling designs and the need to reduce losses by implementing mitigation plans.”

The Prudential Regulation Authority (PRA), which is now part of the Bank of England, outlined their expectations in operational risk modeling. Philip Umande, Technical Specialist at the Bank of England, said that it is essential that models should be kept “simple and transparent” and should always incorporate scenario analysis.

He also emphasized the importance of using Operational Risk models for more than just regulatory capital purposes, but commented that while Operational Risk modeling expectations are similar for Solvency II and ICAS, all Operational Risk models should be easy for both internal and external stakeholders to understand.

Jonathan Humphries, head of financial institutions at Aon, said: “Today’s meeting was aimed at guiding financial institutions through the design, build, validation and use of operational risk modeling. First generation models were built before the financial crisis. In today’s challenging regulatory environment, it is essential that financial institutions understand the need to review and develop their internal models.

“Operational risk is now forming a critical part of mitigating financial loss and it is essential that models not only meet regulatory requirements but also have the ability to deliver real value to business. The meeting was aimed at exploring this.”

Aon concluded: “The session demonstrated what to consider when designing and building a second generation AMA model and how it can deliver real business value by reducing and managing operational risk. Highlighting a case study, Aon and Santander demonstrated the importance of building a model to quantify wider business risks including people risk and cost reduction and management.”

Humphries added: “We are seeing more and more financial institutions who wish to mitigate losses as a direct result of the financial crisis of 2008. At Aon we have helped over 20 AMA banks and other financial institutions to solve issues such as lack of data and establishing result stability. We aim to hold a series of these events to ensure financial institutions have all the tools at their disposal to mitigate risk.”

Source: Aon UK

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