Operational risk reports show losses decrease

Latest operational risk reports show losses decrease, but how will Covid affect the industry?

Global operational risk management association, ORX, have just released their latest annual loss reports. The reports, covering both the banking and insurance sectors, analyse the loss data in ORX’s global operational risk loss databases. Both reports show that operational risk losses have decreased for another year in a row – but what will the impact of coronavirus (Covid-19) be over the coming years? 

Operational risk losses have continued to decrease in both sectors

Neither the banking nor the insurance report shows an increase in operational risk losses. In 2019, the average annual gross loss for banking events was €15.8bn, down from €17.6bn the previous year. The insurance average gross loss was also down on the figure for 2018, at €493m compared to €603m. This is despite the continued growth in ORX Membership – now numbering over 100 financial firms.

Losses by business line and event type

Clients, products and business practices biggest category for banks

The clients, products and business practices event type cost banks a total of €75.3bn in 2019, while the banking business line accounted for over half of the losses in the ORX banking database.

Most insurance losses in execution, delivery and process management

For the insurance industry, the execution, delivery and process management event type cost the most at €1.7bn. The life business line made up 43% of losses, closely followed by non-life non-life at 38%.

How will coronavirus impact losses in 2020 and 2021?

Both the reports cover losses from previous years, so will the industry continue to see decreases in the coming years? While business continuity plans and operational risk teams were largely successful in keep organisations going, the coronavirus pandemic has already impacted firms. It has affected their ability to conduct business, provide services and their staff. On top of this, economies around the world are experiencing downturns.

In accordance with ORX’s industry-leading operational risk reporting standards, ORX members will be reporting direct losses of coronavirus under the natural disasters and other events category. Guidance from ORX on how financial can capture the operational risk impacts of coronavirus, including what costs to include and exclude is freely available here. This was developed through conversations and regular working groups with ORX members.

Gaining a true picture of the impact of the pandemic

To get a full picture of what coronavirus has cost the financial services industry, it’s important to capture the indirect impacts as well as the direct ones. To do this, ORX is asking one simple question:

“Would the impact have been experienced without the pandemic?”

To allow for future analysis of the indirect impacts of coronavirus, ORX is asking their members to tag indirect losses with a ‘coronavirus flag’. Once this data has started to be collected (expected to be Q3 onwards), then ORX will be able to provide a clearer view of what the crisis has cost the industry.