Basel: Can Insurance Transfer Risk Outside A Bank

Basel, Switzerland (People Port) As AIG seeks to pay off its debt this week, Last week, The Basel Committee on Banking Supervision issued Recognising the risk-mitigating impact of insurance in operational risk modelling. The essence, to what extent a bank's risk management efforts, capital requirements, may be transferred outside that institution because they are insured.


The regulatory capital framework permits banks, subject to certain criteria and limitations, to use insurance to mitigate the operational risk capital charge under the advanced measurement approach (AMA). The implementation of this provision has raised some challenges and technical questions.

AIG became a household word from its underwriting of banks around the world. Had it entered bankruptcy here, its assets overseas would have been sized, further complicating our meltdown.

In its attempt to protect the global financial system, Basel developed a new set of tools supervisors may use. Their paper goes on, pointing out key considerations, complexities. How capital may be reduced for the insurance bought. Basel points out the extent operational risk can be identified and transferred outside a bank and to what extent -other risks are created.

The banking industry, those serving it have asked for additional clarity, consistency in insurance risk mitigation. Basel II Framework intended to continue an ongoing dialogue with the industry on operational risk mitigation. It is not Basel's paper intent to dispute, discourage enhancements in the use of operational risk insurance. Potential adverse effects come from using insurance to reduce, replace, capital or risk management.

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