elseware consulting

Operational risk represents a significant share of regulatory capital for financial institutions. This capital is driven by major and extreme events and not by an unexpected increase of recurring events.
MSTAR allows a forward-looking, structured assessment of major scenarios (fraud, cyber, legal, conduct, disruptions) and is used in regulatory approved models in US, UK and Europe.

Firms must adapt their insurance programs to their risk profile. This concerns both the average risk to assess premiums and the extreme risk to assess the limits.
MSTAR allows mapping between scenarios and insurance lines, taking into account deductibles, aggregates, and other parameters.
MSTAR simulations help improving the insurance coverage and support negotiation with the insurers.

Risk mitigation actions are relatively easy to assess for recurring risks: an improved control can be directly evaluated on the observed number of incidents or their cost.

But how can one assess the effectiveness of mitigation actions on extreme events, since these risks happen very rarely?
MSTAR what-if analysis allows testing of mitigation actions, and helps justifying the investments necessary for their implementation.

As part of the preparation of a TCFD report, financial institutions need to establish a measurement framework.

Based on our methodological approach for Climate related stress assessment we propose a 4-step approach :

To assess the impact of climate change on corporate credit risk, we define two indicators for each borrower:

• The sensitivity to transition is the ratio between emissions and profits.
• The sensitivity to physical risk is the expected increase in natural disasters in the regions where the company primarily operates.

These sensitivity indicators are transformed into default probability multipliers, using the Merton model and the Black-Scholes equations.

Please download our brochure here and our research paper here.

Climate Stress will impact Operational Risk through various causal paths, including:

Using MSTAR's structured risk scenarios, the impact of climate change on oprisk can be assessed seamlessly.

Please download our brochure here and our detailed presentation here.