A Review of the State of the Art in Quantifying Operational Risk

In this paper, we provide a comprehensive review of the different approaches developed to model operational risk, specifically focusing on the actuarial approach. We highlight their relative strengths and weaknesses. In the case of the actuarial approach – that most commonly used by financial institutions – we review the challenges faced (scarcity of data, truncated data, and modeling dependence in both frequency and severity) and offer proposals to overcome them. Our paper’s objective is to provide financial risk researchers with all of the models and proposed developments for operational risk estimation.