How does an imposed requirement of regularly identifying exposure to operational risk benefit an insurance company?
The topic of this research paper is how an imposed requirement of regularly identifying exposure to operational risk benefits an insurance company. Risks occur naturally in all business, but if risk is not controlled, there are plenty of consequences that can arise. Insurance companies deal with risk everyday, ranging from fraud, car theft, health policies, and bonds and stocks. Operational risk is defined as the resulting risk that is present after financial and analytical risk is analyzed. Actuaries are able to use many mathematical and statistical techniques that are used to calculate these risks for insurance companies. Using probability distributions and random variables, actuaries are able to identify, evaluate, and manage or control these risks.
Studies on car theft have been performed to determine the percentage of risk involved in this type of risk. Different theories and hypothesis have been developed to analyze these situations. This allows insurance companies to proceed with the possibility of emerging fraud. Banks also involve different types of risk that can be modeled under a process known as Linear Discriminant Analysis. Life insurance companies involve policies between insurers and policyholders. Every contract is different for every policyholder, so the risk involved with life insurance varies greatly. Calculating these risks accordingly allows the company to determine how to proceed with each individual case in a way to avoid the specific risks. In some cases, calculation of risk computed by actuaries often miss cases of risk. Therefore, more insurance companies are beginning to impose a requirement of analyzing and computing these risks for their benefits. With the ability to identify operational risk, insurance companies are collecting profit and increasing their success.
Throughout history, many businesses have viewed risk in a negative light, trying to minimize or diminish it. However, recent regulatory requirements have been increasing through a variety of businesses to expand methods that address risk. In turn, many businesses have begun to analyze which risks exemplify opportunities and which risk produce possible drawbacks. Risk assessment is an analytical and logical technique for analyzing and assessing possible risks and favorable circumstances that could positively or negatively affect the operations of a business.
Operational risk management, or ORM, focuses on classifying, evaluating, monitoring, and managing operational risk. Operational risk assessment involves evaluating the risk of loss as an outcome of specific process failure. Discussions on operational risk management are becoming more prevalent among regulators, allowing the businesses to realize the need for allocating capital for operational risk. As companies begin to see the benefits of preserving their finances from exposure to risk they are also beginning to create solutions to avoid particular risks. For examples, many insurance companies have begun to impose requirement of regularly identifying exposure to operational risk management, due to the fact that they are exposed to many risk factors. With the aide of actuaries, who deal with financial risk on a day-to-day basis, insurance companies are able to identify, evaluate, and minimize certain negative risks.
The most basic form of risk assessment is descriptive assessments. This includes classifying potential risk based on nominal or ordinal scales. This means either categorizing risks factors with similar attributes or comparing different risk factors with one another. Mathematically, actuaries calculate the probability of events and estimate incidental outcomes to allow for and result in minimized loss. Actuaries specialize in probability distributions and use this area of study to test the level…