Non-financial Risks: Operational and Business Risk

René Doff

This chapter will discuss non-financial risks: operational and business risks. We call these non-financial not so much because they cannot have financial impact, but rather to point out that they are different from the investment and underwriting risks addressed in the two previous chapters. Non-financial risks are not less important, on the contrary. However, non-financial risks are faced in the same way by non-financial institutions (such as shops or factories), whereas investment and underwriting risks are typically only a challenge for the financial industry. The focus on non-financial risks began for the banking industry at the time when they were aiming to achieve a better understanding of the full risk spectrum. Over time, insurers have also adopted the approaches developed by the banks. One thing should become clear from reading this chapter: non-financial risks are much more difficult to capture in economic capital than the risks of the two previous chapters.

WHAT IS OPERATIONAL RISK?

Not so long ago, operational risk was still defined as “everything but market and credit risk”. For many years, operational risk was a catchall for all kinds of incident that did not