The Cost of Operational Risk Loss Insurance

27 Pages Posted: 7 Feb 2011 Last revised: 27 Mar 2011

See all articles by Robert A. Jarrow

Robert A. Jarrow

Cornell University - Samuel Curtis Johnson Graduate School of Management

Jeffrey Oxman

University of St. Thomas

Yildiray Yildirim

Zicklin School of Business, Baruch College - The City University of New York

Date Written: May 5, 2008

Abstract

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.

Suggested Citation

Jarrow, Robert A. and Oxman, Jeffrey and Yildirim, Yildiray, The Cost of Operational Risk Loss Insurance (May 5, 2008). Review of Derivatives Research, Vol. 13, No. 3, 2010; Johnson School Research Paper Series No. 19-2011. Available at SSRN: https://ssrn.com/abstract=1755601

Robert A. Jarrow

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

Department of Finance
Ithaca, NY 14853
United States
607-255-4729 (Phone)
607-254-4590 (Fax)

Jeffrey Oxman

University of St. Thomas ( email )

1000 LaSalle Ave.
Minneapolis, MN 55403
United States

Yildiray Yildirim (Contact Author)

Zicklin School of Business, Baruch College - The City University of New York ( email )

55 Lexington Ave., Box B13-260
New York, NY 10010
United States

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