How practical is op risk insurance?

PARIS AND NEW YORK - The decision to allow the use of insurance to offset operational risk charges, under international and European risk-based regulatory frameworks, has opened yet another proverbial can of worms for banks.

Under Basel II, insurance is allowed to offset op risk under the advanced measurement approach (AMA). Within Europe, the third draft of the European Union’s capital adequacy directive (Cad3) proposes allowing insurance for the basic indicator approach and also the standardised approach. But banks and regulators are asking themselves just how valuable is insurance as an op risk hedging tool.

"In so far as insurance can be a hedge, it is as yet unproved, and has some fundamental structural

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