Operational risk capital and insurance in emerging markets

feature of the approach is the multivariate fashion in which both, the frequency oflosses and the severity of each loss, are modeled together with the conditioningfactors. This is the type of data that might be available with the use of the data setproposed above. The implication of the multivariate modeling introduced in thepaper overcomes the usual limitations of standard LDA approaches regarding theuse of conditioning factors in the determination of operational risk capital as BCBSguidelines suggest.Marginal changes in controls and business conditions do in practice have effectson the frequency of losses and their severity. The multivariate approach takenhere allows to assess those effects. Furthermore, whether a particular insurancescheme, given specific controls and business conditions, is suitable or not, is alsoa question that is naturally answered in the proposed methodology. Due to all thesereasons, the paper provides a useful decision making tool for financial institutions.In particular, regulators can use the methodology as a reference for the assessmentand approval of the implementation of AMA proposals. This is crucial especiallywhen financial institutions holding insurance seek the approval of capital reduction.As observed in Part II, insurance reduces expected and non expected losses onlyinsofar as appropriate insurance policy schemes are taken (level of deductibles,limits and son on).Therefore, from all the issues raised here, it is possible to conclude that the insuranceindustry has a great potential to contribute to the management of operational riskin emerging-market financial institutions. The realization of this potential not onlydepends on those financial institutions but also on their regulators that may speedup the utilization of insurance services in operational risk management.SBS Revista de Temas Financieros 48