The importance of operational risk management in insurance industry

In previous years we have witnessed the globalization of the financial structure of the international economy. Mentioned process has led to the appearance of serious risks of the insurance companies and the world's economy as well. In order to stable development of its business and equal participation in a large competitive market, primarily for the protection of its customers and preserving the system stability and liquidity, insurance companies have to build in their strategic goals into risk management strategies. Until recently, attention was mainly focused on the security risks and the risks of investing. However, more complex operational functioning of insurance companies has led to a greater sensitivity to other risks that could jeopardize the business of insurance companies, one such risk is operational risk. Operational risk is one of the most difficult business risks for both the insurance company and for its customers. Operational risk management is not a new concept for financial institutions. The stability of information systems, customer requirements, or errors in internal control was followed for years. Yet, all of these elements are previously treated separately. Turning point in the consolidation and standardization of operational risk has brought Solvency II. Bearing in mind the fact that operational risk arises from imperfection of business processes and technology systems, it is difficult, and in many cases impossible to do prediction based on historical data, it is necessary to pay special attention on this topic. The aim of this chapter is to explain the concept of operational risk, and operational risk management processes with regard to the framework provided by Solvency II.