Insurance industry moving too slowly on op risk

Insurance companies are failing to move quickly enough to offer operational risk regulatory capital charge protection coverage, according to Philip Martin, director of HSBC’s operational risk consultancy. Speaking at Risk magazine’s OpRisk Europe 2002 conference in London on Wednesday, Martin said prominent names in the insurance industry, including AIG and Lloyds of London, are not doing enough to make operational risk insurance a feasible reality.

This appears to be a reversal of past trends, where banks failed to use insurance to mitigate against operational risk losses, such as rogue trading, following the collapse of UK investment bank Barings in 1995. Other insurance policies that cover operational risk liabilities include computer crime, business interuption and fraud coverage.

Insurance broker Aon is one of only two firms to be actively encouraging the growth of the operational risk insurance market, said Martin. “There is definitely a role for insurance companies to play in insuring banks against high severity unexpected losses,” said Daniel Butler, the London-based director of Aon’s financial institutions and professional risk division.

In September last year, the Basel Committee lowered its proposed operational risk capital charge in Basel II from 20% to 12%. “This was certainly a recognition of the fact that the banking world does cover itself by insurance, and that insurance has a major role to play in mitigating operational risk,” claimed Butler. But the Basel Committee has yet to be convinced that banks can insure their entire operational risk.

A lack of operational risk data and expert underwriting staff at banks has also made insuring operational risk difficult, said Martin. “The financial services industry has to measure its operational risks adequately, then insurers will be able to better find a solution.”

Meanwhile, Thomas Leddy, a London-based marketing executive for operational risk at reinsurer Swiss Re New Markets, added that the market for operational risk insurance requires a consensus by insurers and banks about what areas insurance companies should cover in policies. “One of the problems is that our competitors aren’t moving as quickly as us in this area,” said Leddy. “And at the end of the day we are interested in developing a large market – not just one in which there are only a few players.”