The Management of Operational Risk Through Appropriate Insurance Schemes

Political Risks All banks operating within the Gulf Region are subject to certain distinct geo-political risks. However, if viewed in a broader perspective, these risks are certainly no more severe than those faced by banks operating in other areas. Therefore, of far more concern from an operational risk perspective is the prospect of new and more restrictive banking and securities regulations in other countries in which Saudi banks operate. Within the Kingdom, the prospect of punitive and highly restrictive regulation must be viewed as remote. However, in those oversees areas in which Saudi banks have significant business interests that some restrictive regulations may be expected. Given the major social and political changes taking place in the industrialized countries and developing world, all markets now possess a significant degree of political instability for international banking operations. Therefore, it is imperative that all Saudi banks operating outside the Kingdom or significantly involved with international trade, develop management systems and procedures for actively monitoring operational risk associated with the political and regulatory environments in which they conduct their business operations. Such systems should include appropriate "red flag" and warning indicators, and effective alternative strategies and action plans to prevent or mitigate losses. 3. Management of Operational Risk Through Insurance Schemes The successful management of operational risks is central to the long-term profitability and . survival of a bank. All banks are exposed to a variety of such risks and must develop an integrated management approach for their effective control. Management response must include a strong organizational structure, an affective system of internal controls' segregation of duties, ; internal and external audits, physical security procedures, etc. Another important method to limit operational risk includes the purchase of insurance. The various forms of insurance schemes include self insurance, regular insurance and other insurance alternatives, encompassing retention groups, group captives, risk sharing pools, etc. Insurance is a method to fund a loss exposure as opposed to managing or controlling risks. Other effective i mechanisms to limit the impact of losses arising from operational risk include the finite risk insurance approach. This approach involve risk transfer through regular insurance and self insurance, and generally has an upper limit to its liability, hence finite insurance.