OpRisk Insurance as a Net Value Generator

OPERATIONAL RISK TOWARDS BASEL III, pp. 289-310, Operational Risk Towards Basel III, G. N. Gregoriou, ed., 2009

23 Pages Posted: 29 Aug 2010

See all articles by Wilhelm Kross

Wilhelm Kross

Independent

Werner Gleißner

Dresden University of Technology - Faculty of Economics and Business Management

Date Written: June 4, 2009

Abstract

Insurance coverage had historically been somewhat neglected in real life OpRisk initiatives, partially due to the fact that the early versions of the Basel II framework did not accept insurance as a permissible means of minimum regulatory capital reduction. Moreover, proponents of the Capital Asset Pricing Model (CAPM) to date believe that insurance implies no net value generation, given that only capital market-related aspects captured in the beta factor truly count in the description of the risk position of an enterprise.

Change is happening, however, for good reasons. This chapter presents why and how the understanding of and the traditional approaches to OpRisk management can and should be enhanced to better reflect what truly counts in operational and enterprise risk management; and in how far insurance can play a role. In presenting the findings, we also demonstrate that in the real world, with a limited risk-bearing capacity, the reduction of risk-adjusted capital and the consequential decrease of the cost of capital through operational risk transfer mechanisms cannot be explained with the CAPM.

Suggested Citation

Kross, Wilhelm and Gleißner, Werner, OpRisk Insurance as a Net Value Generator (June 4, 2009). OPERATIONAL RISK TOWARDS BASEL III, pp. 289-310, Operational Risk Towards Basel III, G. N. Gregoriou, ed., 2009, Available at SSRN: https://ssrn.com/abstract=1659850

Wilhelm Kross

Independent ( email )

Werner Gleißner (Contact Author)

Dresden University of Technology - Faculty of Economics and Business Management ( email )

Mommsenstrasse 13
Dresden, D-01062
Germany