Operational risk and the Solvency II capital aggregation formula: implications of the hidden correlation assumptions
Author
dc.contributor.author
Cifuentes, Arturo
Author
dc.contributor.author
Charlín, Ventura
Admission date
dc.date.accessioned
2017-12-21T14:02:40Z
Available date
dc.date.available
2017-12-21T14:02:40Z
Publication date
dc.date.issued
2016
Cita de ítem
dc.identifier.citation
Journal of Operational Risk 11(4), 23–33
es_ES
Identifier
dc.identifier.issn
1744-6740
Identifier
dc.identifier.other
10.21314/JOP.2016.181
Identifier
dc.identifier.uri
https://repositorio.uchile.cl/handle/2250/146257
Abstract
dc.description.abstract
We analyze the Solvency II standard formula (SF) for capital risk aggregation in relation to the treatment of operational risk (OR) capital. We show that the SF implicitly assumes that the correlation between OR and the other risks is very high: a situation that seems to be at odds with both the empirical evidence and the view of most industry participants. We also show that this formula, which somehow obscures the correlation assumptions, gives different insurance companies different benefits for diversification effects in relation to OR. Unfortunately, these benefits are based on the relative weights of the six basic capital components and not on any risk-related metric. Hence, contrary to what has been claimed, the SF does give diversification benefits (although minor ones) in relation to OR. Further, since the SF does not treat the correlation between OR and the other risks explicitly, it provides no incentive to gather data regarding this effect. Given all these considerations, for the time being, we recommend the adoption of the well-known linear aggregation formula, using low-to-moderate correlation assumptions between OR and the other risks