The Management of Operational Risk Through Appropriate Insurance Schemes

Disadvantages As with all approaches to managing operational risk. finite risk insurance has certain drawbacks: Risk Management Expertise - To effectively blend the internal and external financing elements necessary in a successful finite risk program, it is necessary that management clearly understands the nature and magnitude of the bank loss exposures and is willing to pav for a significant portion of these exposures through self-insurance. Banks' must have a very clear view of the financial resources they will need for these programs. Since these programs are multi-year in nature, a bank must be certain about its future period cash flows and how much cash it wants to devote to the program. Otherwise finite risk management programs simply will not work more effectively with structuring the program than will normal conventional insurance. Cost - Since finite programs are typically structured for three to five years, they may represent a higher initial cost both in terms of guaranteed premiums and costs associated with structuring the program than will conventions insurance. They are certainly more expensive than self insurance. In addition, failure to control losses over the period of the contract may result in no return of premium one of the primary advantages of finite programs, 4. Risk Management Evaluation Questionnaire This Operational Risk Management Evaluation Questionnaire is designed to provide a tool to assist Banks within the Kingdom in assessing and quantifying the adequacy of their programs for managing and financing operational risk This is not a detailed questionnaire, but covers the main areas of importance in the implementation and management of an effective program of operational risk management within the bank. For this assessment to be both accurate and objective, the questions should be completed by staff who have an appreciation of overall operational risk management and the implications of the questions with respect to the banks operations and financial planning but who do not have day-to-day responsibility for either major operational areas or for the institution's insurance program. Involvement of Internal Audit personnel may provide both technical assistance in assessing operational risk and controls as well as helping to insure objectivity in the survey process. There is no "pass" or "fail" score for this Questionnaire. Primary questions are designed to elicit a "yes" or "no" answer. A written response or comment to all questions may be given when the institution uses a different approach than that stated to address the issue or if it is felt that there are or other considerations which should be brought to management's attention. Accordingly, this questionnaire is divided into: (1) Management oversight (2) Risk Assessment (3) Operational Risk Reduction and Control (4) Insurance Options The scope of all answers should include both domestic and foreign operations i.e inside and outside Saudi Arabia. Management Oversight 1. YES No COMMENTS Has the Bank developed an Operational Risk Management Plan outlining objectives, policies, and standards ? 1.1 If yes to 1, has this plan been: * Formally approved in writing by the Board of Directors? * Disseminated in writing by senior management ? * Reviewed on at least an annual basis ? Have annual Operational Risk Management Program Goals been established in terms of measurable organizational objectives where possible (i.e., a 50% reduction in branch fraud, a 15% reduction in credit card losses, etc.) ? 2.2 Is the Plan; formally evaluated against these Goals on at least an annual basis by the Board of Directors ? Has an Operational Risk Manager been appointed to address overall operational risk management and financing issues within the bank ? 3.1 If yes to 3, is this a full-time position ?