Leading Insurers Working On Common Op Risk Stance

ZURICH AND LONDON -- Leading insurance companies are working together on a common response to questions raised by global banking regulators about the potential role of op risk insurance under the proposed Basle II banking capital accord.

The response would seek to make the case for insurance as a way of mitigating the op risk capital charges that large international banks will have to allow for from 2004 under the terms of Basle II.

Concerns

The insurers want to allay the concerns about op risk insurance expressed by the authors of Basle II, the Basle Committee of banking supervisors from the Group of 10 leading economies.

The Basle regulators believe op risk insurance could be used to reduce the amount of capital banks will be required to set aside to guard against such operational hazards as fraud, computer system failure and trade settlement errors.

But they are concerned about whether insurance companies will pay out fast enough in the case of a banking emergency. They are also concerned about exclusion clauses. The regulators also ponder whether using insurance will merely swap operational risk for credit risk -- that is, the chance that the insurer might go out of business.

The acid test for the 14 companies will be whether they will agree a common stance in time for the May 31 deadline for comment on the Basle II proposals, says Roland Avery, London-based managing director of the financial institutions division of insurance brokers Aon Group.

The 14 companies had earlier accepted an invitation to an early April meeting in London, which had been extended by Aon to 16 of the world’s largest insurers in terms of a combination of market capitalisation, high credit ratings and global reach (see Operational Risk, April 2001).

Aon’s Avery declined to comment further or to name the companies involved in the April meeting.

Basle II has certainly prompted stirrings in the insurance industry. But the politics of the competitive insurance world makes insurance industry sources reluctant to go into detail for fear of giving too much away.

And there is some scepticism among industry analysts about the chances of agreement among the 14 companies, amid signs that other initiatives are also afoot on the op risk insurance front.

For instance, the European Financial Institutions Risk Managers Forum (Efirm) is also planning to put its views on op risk insurance to the Basle regulators. Efirm provides a forum for risk and insurance managers at major European banks.

Günter Dröse, chairman of Efirm’s operational risk working group, confirmed that the organisation is putting forward a paper to the Basle regulators but declined to give details.

Discontent

But banking industry analysts said Efirm’s initiative could reflect discontent among risk managers in banks over the insurance industry’s approach to op risk. Some bankers feel the insurers lack a true understanding of the nature of banking op risk.

Lars Schmidt-Ott, Zurich-based head of global banking practice at the Swiss Re insurance group, says two approaches to op risk insurance seem to be developing in terms of Basle II.

One is based on tried-and-tested products that already insure many types of op risk. The other seeks to address the problem with an all-embracing new op risk product. Swiss Re was one of the firms present at the London meeting.