The Cost of Operational Risk Loss Insurance
Robert A. Jarrow
Cornell University - Samuel Curtis Johnson Graduate School of Management
University of St. Thomas (Minnesota) - University of St. Thomas, Minneapolis
Syracuse University - Whitman School of Management
May 5, 2008
Review of Derivatives Research, Vol. 13, No. 3, 2010
Johnson School Research Paper Series No. 19-2011
Using the Algo FIRST operational risk database, this paper computes the cost of operational risk loss insurance for a sample of banks over a 1-year horizon. The estimated cost of 1-year operational risk loss insurance for an average bank is 1.24% as a percentage of firm value on December 31, 2006, while an average AA bank is 0.24%. These estimates far exceed the typical 1-year default insurance premiums as reflected in market CDS rates for similarly rated banks. These insurance premiums confirm the economic importance of operational risk in the management of financial institutions.
Number of Pages in PDF File: 27Accepted Paper Series
Date posted: February 7, 2011 ; Last revised: March 27, 2011
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