This Guide characterises top priority scenarios for operational risk in the insurance industry and provides best practice guidance for their likelihood and impact assessment. It brings together the views and thinking of leading insurers in the Operational Risk Consortium (ORIC) to help firms around the world manage their operational risk exposures more effectively. This is the first comprehensive industry-wide benchmark for operational hazards against which a firm’s approach to scenarios can be compared, and should therefore be of great importance to insurers as well as regulators.

This Guide is an important contribution to our understanding and management of operational hazards in the insurance industry. By identifying top priority scenarios for operational risk and explaining rigorous ways to go about their likelihood and impact assessments, this Guide addresses the two main purposes for the establishment of the Operational Risk Consortium (ORIC) by the ABI back in 2005.

The first was in anticipation of the ground breaking changes to insurance regulation that were coming with Solvency II. From our understanding of the difficulties bankers had experienced with operational risk within Basel II, their equivalent, if somewhat less sophisticated prudential standards, those connected to ORIC recognised the benefits of early and wide-ranging collection of operational loss data. This remains necessary if insurance companies are going to be able to generate counterfactuals in their modelling of operational risk, or at the very least generate a mean from which they can explain variance. Good data collection underpins any serious effort to move away from crude operational risk capital allocation. This in turn requires clear categorisation of events – something scenario analysis and ORIC have the capacity to deliver.

The second purpose focuses on operational risk management and threat assessment within an insurance company. Operational risk is not generally as clear cut as credit or market risk, and indeed is often subsumed within an amorphous and ill-considered definition of "insurance risk" (a risk type linked to the underwriting of life and general insurance). The process of engagement in thinking through and applying sound scenario analysis enables insurers to break out operational risk and get a real sense of when it is occurring. In breaking out a pricing failure from an underwriting decision, or staff failings through stress as opposed to underperformance, it is possible to get a better handle on the management of major operational threats.

This Guide furthers both of these goals behind ORIC by developing and formalising thinking about scenario assessment, thus marking a further stage in the development of operational risk thinking within insurance; and it should encourage more insurers around the world, not just the current membership of ORIC to take these matters very seriously indeed.

Peter Vipond - Former ORIC Chairman