Recognising the risk-mitigating impact of insurance in operational risk modelling

The Basel Committee on Banking Supervision today issued Recognising the risk-mitigating impact of insurance in operational risk modelling. The paper discusses potential benefits and shortcomings of banks' use of insurance to mitigate operational risk.

The regulatory capital framework permits banks, subject to certain criteria and limitations, to use insurance to mitigate the operational risk capital charge under the advanced measurement approach (AMA). The implementation of this provision has raised some challenges and technical questions. In response, the report clarifies supervisory expectations on the range of industry AMA practices while promoting increased convergence in operational risk management.