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CEBS Guidelines on Operational Risk Mitigation Techniques (CP 25) Consultation Feedback Summary

1. Overview of Consultation Process

• Consultation Period: CEBS submitted the Guidelines on Operational Risk Mitigation Techniques (CP 25) for public consultation from 15 April 2009 to 7 July 2009.
• Responses Received: Four written responses were received, along with additional input during a public hearing held on 9 July 2009.
• Reasons for Low Participation: The low level of engagement is attributed to the current state of financial markets and the limited availability of products in the field of Other Risk Transfer Mechanisms (ORTM).
• Scope of Feedback: Some comments were outside the scope of the consultation and were not addressed, including those related to Pillar II and changes to the CRD.

2. Key Points from the Consultation

2.1 Use of Insurance in Operational Risk Management

• Respondents emphasized the importance of insurance as a risk management tool and encouraged supervisors to incentivize its use.
• The use of insurance for capital alleviation is already addressed in CEBS's "Guidelines on the use test for AMA institutions" (GL21).

2.2 Development of ORTM

• Concerns were raised that the Guidelines might not sufficiently support the development of ORTM.
• CEBS clarified that the Guidelines aim to ensure convergence of supervisory practices and provide a framework aligned with insurance product regulations.

2.3 Continued Dialogue on ORTM

• Respondents expected further discussion on insurance-specific aspects such as haircuts, provider eligibility, and the 20% limit.
• CEBS confirmed its intention to continue the dialogue and review the guidelines as more experience is gained. The 20% limit was reaffirmed as consistent with recent CRD changes.

2.4 Granularity of Insurance Contract Mapping

• Respondents supported the need for sufficient granularity in mapping insurance contracts but highlighted the importance of considering high severity scenarios.
• CEBS acknowledged this and suggested that internal loss data, where relevant, can serve as a basis for capital calculation. However, scenario analysis should also be considered for capturing coverage mismatches.

2.5 Treatment of Captives and Affiliates

• Some respondents were concerned about the restrictive approach to captives and affiliates.
• CEBS clarified that the Guidelines do not restrict the CRD's requirement for independent third-party entities and aim to assist supervisors in assessing risk transfer effectiveness.

2.6 Haircuts Based on Product Maturity

• Respondents questioned the application of haircuts based on maturity and whether they should be applied gradually.
• CEBS noted that the haircut treatment is based on the CRD and suggested that it may be necessary to apply it gradually. Supervisors have discretion in applying this based on contract terms, AMA model, and market conditions.

2.7 Rating Requirements for Insurance Providers

• Respondents asked about the recognition of unrated or low-rated insurance companies.
• CEBS stated that insurance contracts must be provided by entities rated by an eligible ECAI with a credit quality of step 3 or above. Parent company ratings are not required under the CRD.

3. Key Amendments to the Guidelines

• Paragraph 14: Amended to reflect the purpose of the Guidelines, emphasizing the use of scenario analysis for capturing coverage mismatches.
• Paragraph 19: Amended to clarify the application of haircuts based on maturity, allowing for flexibility in supervisors' decisions.
• Paragraph 21: Amended to include the consideration of scenarios in the assessment of insurance mismatches, in addition to internal loss data.

4. Conclusion

CEBS revised the Guidelines on Operational Risk Mitigation Techniques based on the feedback received, incorporating key suggestions while maintaining alignment with the CRD. The final version emphasizes the use of comprehensive data sources, including internal and external data and scenario analysis, to ensure effective risk transfer and capital alleviation. Some suggestions were not addressed due to being outside the scope of the consultation, but may be considered in future work.