Introduction

Cathy Hampson and Gustavo Ortega

Operational risk has been summarised as the loss incurred from inadequate or failed internal processes, people and systems, including risks from external events that impact on business operations. It includes legal and reputation risk. It is often referred to as the inherent risk – from doing business – that excludes credit, market and insurance risk. Operational risk is pervasive and can take the shape and form of very large losses that can cripple an organisation. Its presence is felt in every facet of the business cycle, and for insurance companies it starts from the time of quoting a policy for a client. In this book, we will cover operational risk management for insurance companies, and, in this context, we have defined operational risk as the risk of loss or adverse consequence from failure in process, people, systems and external events.

The financial-services industry has undergone a significant change over the last two decades. The evolution in information technology has transformed the way business is done for financial institutions. Banks and insurers operate today in an environment that is driven primarily by three factors: customer demand, product innovation and