Operational risk under Solvency II: A brief overview of current approaches

As companies implement Solvency II programs, operational risk, often seen as a catch-all for ‘other’ risks, is being recognized as having greater impact than was previously realized.

Management of operational risks—and preparing companies to handle these risks—is now seen as a key aspect of sound insurance management.

Operational risk is also moving up companies’ agendas because the capital charge under the Solvency II Pillar I standard-formula calculation is a rough measure—it is essentially based on business volumes. While this has the benefit of simplicity, it may lead to what could be considered excessive capital requirements.

This paper provides a brief summary of how companies are currently approaching operational risk under Solvency II, and gives some suggestions for improvements using innovative techniques.