Energyforum
Operational Risk Management
2-3 October 2008, Antwerp, Belgium
DAY 1: 9-17
Morning session: Luísa Serra, Risk Manager, EDP
Energy Sector - Setting the scenario: Main accidents and business trends
Enterprise Risk Management (ERM)
- History - The main events that lead to ERM development: Presentation and detailed analysis Enron, Barings, etc.
- Definition - What is an ERM? Roles and responsibilities, objectives, components, effectiveness
- Current trends - From legislation Compliance to a Risk Return Optimization
- How to implement an ERM System - A guideline for companies to set up a risk management system
- Definition
- Classification - Main types of operational risk: Business support processes and Operations
- Assessment - Strategies for risk identification, qualitative assessment and quantitative assessment characterization
- Models - Modelling frequency (Poisson) and severity (Weibull), loss distribution (Monte Carlo), mean values and worst case values
- Case Study: Risk Transfer Analysis in insurance (auto vs. external insurance)
Integrated frameworks and tools - Risk Portal
- Methodology - Risk theory behind the Portal
- IT System supporting the Portal
- Risk Assessment Functionalities - How the system helps to identify and assess risks
- Implementation Strategy -Data homogeneity, BU's risk assessment prioritization, partial results, final results
- Risk management Functionalities - How to use the Portal as a risk management tool, from top management to process management
1st Afternoon session: Agustín Moliner de Palacio, Deputy Risk & Finance Control Manager, Endesa
Using Eurelectric's Framework to carry out an Operational Risk Self Assessment in the Trading Area of an Energy Company
General characteristics of scenario analysis
- Guidelines
Scenario Analysis process
- Definition of the scope
- Parameterization
- Execution
- Review and fine tuning
- Reporting and maintenance
Methodology: Quantitative analysis of subjective estimates
- Introduction
- Actuarial approach
- Determination of classes for frequency, mean severity and worst case
- Input treatment (subjective estimates) and output determination
- Aggregation of results
Methodological Features
- Distribution Hypotheses, worst case
- Poisson (frequency)
- Weibull (severity)
- Lognormal (severity)
- Loss distribution: convolution
2nd Afternoon session: Andrew Sheen, Manager Operational Risk, FSA
The approach for Banks and Investment firms
- Basel Accord v. the EU Capital Requirements Directive
- The three pillars
- Qualitative and Quantitative Requirements
- The methodologies
- Nature, scale, size and complexity
Commodity Trading firms (Physical and Derivatives)
- The current position
Solvency II (Insurance firms)
- The current position
-Can COSO help?
-Operational risk framework components
-Insurance as an operational risk mitigant
-Reporting on operational risks in the annual report?
DAY 2: 9-17
1st Morning session: Dr. Frank De Jonghe, Delo itte
Quantification of Operational Risk: The lessons learnt from the banking industry
- Reminder: overview of the different building blocks of the operational risk management infrastructure in the banking industry
- Loss data base, the backward looking approach
- Scenario analysis, Control Self Assessments: the forward looking approach
- Modelling frequency and severity of operational risks, and the annual impact distribution
- Linking the rating of an issue with the company's financial strength
- Qualitative overview of some of the mathematical tools: monte carlo simulations, extreme value theory, the actuarial approach to risk aggregation
2nd Morning session: Sergio Scandizzo, Head of Operational Risk section, European Investment Bank
The implementation of scenario-based AMA (1 hour)
- Scenario analysis in operational risk management
- A scenario-based AMA
- Validation and backtesting
- Case study
Afternoon session: Elías Fernandez, Senior Risk Analyst, Iberdrola
Operational Risk in electric utilities: A proposed framework
- Why is operational risk important in electric utilities? It's been traditionally managed by utilities from a maintenance optimization point of view and through insurance
- The "event" as the key element of operational risk models
- An example of operational risk framework (Eurelectric Linneaus project) : Event Model, Risk Factor Model, Effects Model
Operational Risk Management: Risk policy
- Risk policies (in generic) as a basic tool to manage risk from a corporate-integrated point of view, from an ERM approach
- Importance of operational risk quantification as part of global risk apetite
-
Components of an operational risk policy:
Preventive actions: business lines management (business lines)
Mitigation actions: corporate management (insurance policy)
Limits and key indicators
How to optimize risk insurance with operational risk management
- Combination of premium + maximum loss as a goal to optimize
- How to calculate maximum loss according to franchise levels: importance of historical data + estimations + good segmentation (frequency + severity)
- Importance of event registrations under franchise.
Less information is available due to the general premium increase in 2001 that resulted in higher franchise levels
-
Practical exercise with excel:
Events registration database segmented
Qualitative assessment and change of historical data
Scenario definition
Data input for severity simulation
Data input for frequency simulation
Simulation for each scenario
Choice of best combination premium + maximum loss
Lessons learned from operational risk management projects
- Key success factors and main risks of an operational risk project
