Beyond the headlines: Insurance

Transcription

1 +44 (0) Beyond the headlines: Insurance Operational risk loss data for insurers submitted in 2016 August 2017 Managing risk together

2 1 Beyond the headlines: Insurance Foreword Foreword The ORX Insurance Service was set up in 2015 with an original six members. By August 2017, we had grown to 15 members, including a good proportion of the world s largest global insurance and re-insurance firms. This growth has enabled ORX to present this first public report on the insurance operational risk loss database. It provides an overview of the data reported since inception up to the end of 2016 and illustrates the industry operational risk trends that can be observed. ORX has leveraged its extensive experience to provide the most comprehensive and professional operational risk management service for the insurance industry. In addition to the sharing of loss data, insurers benefit from access to a global network of operational risk professionals and leading edge, insurance focused, risk management research. Diethard Kaiserseder, Head Group Operational Risk Management, Swiss Re This report will continue to be produced annually and will be enhanced as the database size increases (we have already seen growth from c. 3,800 events at the end of 2016, to c.4,500 by August 2017). ORX has a strategic commitment to continue investing in and growing the service to support enhancements in both operational risk management and measurement in the insurance sector. In addition to the anonymous sharing of loss data, becoming a member of the ORX Insurance Service enables you to work with your peers and gain access to a leading edge risk management resource. Benefits include: A dedicated insurance community on the Members website Access to a range of online resources including benchmarking yourselves against your peers The opportunity to participate in leading edge operational risk research and the development of risk management practices and tools Access to a global network of operational risk professionals Free access to ORX forums, including a dedicated insurance forum Steve Bishop Head of Insurance and Asset Management ORX Subscribing to the Global Insurance Service One-off joining fee of 47,000 The joining fee covers becoming an equal owner of the assets of the Association. It also allows a new Member to have access to all our intellectual property and an extensive library of research, data and information that ORX has built up since it was established in Annual membership fee of 33,500 This fee is paid every year and covers the costs of running ORX and delivering our core activities. If you would like further details on this report or you are interested in the Insurance Service, please visit our website at Disclaimer: ORX has prepared this document with care and attention. ORX does not accept responsibility for any errors or omissions. ORX does not warrant the accuracy of the advice, statement or recommendations in this document. ORX shall not be liable for any loss, expense, damage or claim arising from this document. The content of this document does not itself constitute a contractual agreement, and ORX accepts no obligation associated with this document except as expressly agreed in writing. Operational Riskdata exchange Association (ORX) 2017

3 Beyond the headlines: Insurance Introduction Trends 2 Introduction This is the first annual report on the ORX insurance operational risk loss database and illustrates trends in operational risk losses within the insurance and reinsurance industry. This edition is based on submitted loss and income data from 12 insurance firms. The submitted loss data all have a recognition date between 1 January 2012 and 31 December 2016 and includes loss data submitted to the life, non-life and corporate items business lines. Members reported a total of 3,935 loss events totalling 3,070m in gross loss for the 5 years from 2012 to Each loss event submitted has a gross value greater or equal to 20,000. This report provides a summary of the data for 2012 to 2016, as well as highlighting trends in frequency and severity by year, business lines and event type. Trends In 2016, the average mean loss was 478,682, which is less than half the average mean loss in 2012 of 1,130,782. Also in 2016 our Members lost 1.03 per 1,000 of gross income through operational risk events. This is down from just over 2 per 1,000 in These differences cannot be explained by the frequency of events as fewer events were submitted in 2012 than in 2016 and the frequency year on year remains relatively stable. Operational risk loss distributions are often dominated by the occurrence of very significant loss events and the disparity between 2012 and 2016 can likely be explained by the occurrence of a small number of very large loss events. Indeed, in 2012 the ten largest loss events account for more than 75% of total loss while in 2016, this figure is closer to 50%. ORX reporting standards All ORX Members are required to submit data in line with a common standard and in a common format. The standards are developed and maintained by the ORX Insurance Definitions Working Group. They are published, in detail, as the ORX Insurance Operational Risk Reporting Standards (I-ORRS). The reporting standards will continue to be updated as industry and supervisory practice evolves. Visit here to request a copy: managingrisktogether.orx.org/activities/ standards.

4 3 Beyond the headlines: Insurance Distribution of losses Event frequency by business line and event type ORX Members report their operational losses by business line (life, non-life and corporate items) and by the type of event which resulted in the loss. Losses are reported as corporate items if the loss is experienced by the entire firm rather than a single revenuegenerating line of business. The event type categorisation used by ORX insurance Members is similar to the standard risk types used in banking. More information about ORX standards can be found here managingrisktogether.orx.org/activities/ standards. The most common event type is Execution, Delivery and Process Management (EDPM) which accounts for almost 60% of loss events. This event type covers losses resulting from failed transaction processing or process management and relations with trade counterparties and vendors. In the next section of this document we consider total loss severity by business line and event type and observe that EPDM loss also accounts for the largest proportion of total loss. Figure 1 shows the number of events submitted to ORX for the reporting period 2012 to 2016 for each business line and event type combination. The size of the square is directly proportional to the number of events within each business line and event type combination. Figure 1. The event frequency of losses by business line and event type

5 Beyond the headlines: Insurance Distribution of losses 4 Loss severity by business line and event type ORX Members report their operational losses by business line (life, non-life and corporate items) and by the type of event which resulted in the loss. Losses are reported as corporate items if the loss is experienced by the entire firm rather than a single revenuegenerating line of business. The event type categorisation used by ORX insurance Members is similar to the standard risk types used in banking. More information about ORX standards can be found here managingrisktogether.orx.org/activities/ standards. We observe a similar, if not more extreme, imbalance between the event types when we consider loss severity compared to frequency. Total loss in Execution, Delivery and Process Management (EDPM) and Clients, Products and Business Practices (CPBP) are the most severe accounting for 47% and 37% respectively. Figure 2 shows the total loss due to events submitted to ORX for the reporting period 2012 to 2016 for each business line and event type. The size of the square is directly proportional to the total loss reported within each business line and event type combination. Figure 2. The loss severity by business line and event type

6 5 Beyond the headlines: Insurance Annual summary of loss data Annual summary of loss data submitted to ORX The following results show annual trends in the frequency and severity of operational risk losses which our Members report. These statistics are based on the reporting date of loss events exceeding our reporting threshold. The average loss size in 2012 was more than double the average loss size in 2016 (Figure 4). This is largely due to the occurrence of a small number of large losses. Indeed in 2012 the top ten largest losses account for more than 75 per cent of the total loss reported. The corresponding percentage for 2016 is closer to 50 per cent. As a percentage of total gross revenue, our Member firms lost around 0.1 per cent of income at 1.03 per 1,000 in 2016 (Figure 5). The frequency of losses occurring each year from 2012 to 2016 remains relatively stable (Figure 3). Figure 3. Total number of loss events reported per year Year Total number of reported events Figure 4. Average gross loss size reported per year Year Average loss size ,130, , , , ,682

7 Beyond the headlines: Insurance 6 Annual summary of loss data Figure 5. Total gross loss reported per 1,000 of gross income per year Year Total gross loss per 1k of gross income

8 7 Beyond the headlines: Insurance Quarterly summary of loss data Quarterly summary of loss data submitted to ORX Data is submitted to ORX on a quarterly basis and analysis of the quarterly frequency and severity of our Member firms' loss data reveals the volatility of operational losses though no apparent trend revealing which quarter is most costly. On a quarterly basis, average loss size varies between 200,000 and 2 million (Figure 7). As with the annual results, this volatility is driven by the occurrence of large loss events. Similar levels of volatility can be seen when we consider total gross loss as a proportion of income which varies between 0.40 and over 4.50 per 1,000 of gross income (Figure 8). While annual frequency is fairly stable, we see greater variation when considering quarterly event reporting which varies between 130 and almost 300 (Figure 6). Figure 6. Total number of loss events reported per quarter Total number of reported events Q Q Q Q

9 Beyond the headlines: Insurance 8 Quarterly summary of loss data Figure 7. Average gross loss size reported per quarter Average gross loss size Q1 1,959,900 1,081, , , ,842 Q2 217, ,153 1,104, , ,219 Q3 501, , , , ,435 Q4 1,598,146 1,593, , ,795 1,024,878 Figure 8. Total gross loss reported per 1,000 of gross income per quarter Total gross loss per 1K gross income Q Q Q Q

10 9 Beyond the headlines: Insurance Loss data by size Loss data by size reported to ORX Analysis of the frequency and severity of operational losses after organising loss events into size bins shows that most operational losses are relatively small loss events with only around one per cent of loss events exceeding 10 million. However, the severity of the large loss events is such, that as a proportion of total loss, events over 10 million account for over 40 per cent of our Members total loss reported in 2016 (Figure 10). Figure 9. Proportion of losses falling within loss size boundaries Loss size K 100K 39.2% 40.4% 100K 250K 31.0% 33.3% 250K 500K 12.3% 12.2% 500K 1m 7.8% 7.3% 1m 5m 7.0% 5.4% 5m 10m 1.3% 0.6% 10m+ 1.4% 0.8% Figure 10. Proportion of gross loss falling within loss size boundaries Loss size K 100K 2.8% 5.2% 100K 250K 4.9% 9.6% 250K 500K 4.3% 7.8% 500K 1m 5.6% 8.9% 1m 5m 14.5% 19.8% 5m 10m 9.2% 7.3% 10m+ 58.8% 41.4%

11 Beyond the headlines: Insurance 10 Annual loss as a proportion of written exposure Annual loss as a proportion of written exposure submitted to ORX As well as reporting income at firm level, ORX Members report quarterly the value of gross written premiums by business line. In 2012, more than 2.50 per 1,000 of gross written premium in the non-life business was lost due to operational risk events (Figure 12), while the corresponding figure in the life business line was 1.69 (Figure 11). In 2016, losses in both life and non-life were close to 0.80 per 1,000 of gross written premium. Life Figure 11. Total loss per 1,000 of gross written premium in the life business line Year Total loss per 1,000 of gross written premium Non-life Figure 12. Total loss per 1,000 of gross written premium in the non-life business line Year Total loss per 1,000 of gross written premium

12 +44 (0) Managing risk together ORX believes many heads are better than one. We re here to bring the best minds of the international operational risk community together. By pooling our resources, sharing ideas, information and experiences, we can learn how best to manage, understand and measure operational risk and become less vulnerable to losses. We work closely with over 90 Member firms to develop a deeper understanding of the discipline and practical tools. We set the agenda, maintain industry standards, and garner fresh insights. ORX is owned and controlled on an equal basis by its Members. For more information about ORX, visit our website at Contact Dr Luke Carrivick Head of Analytics and Research luke.carrivick@orx.org Steve Bishop Head of Insurance and Asset Management steve.bishop@orx.org Dr Sarah Astill Statistical Manager sarah.astill@orx.org