Non-parametric estimation of operational risk losses adjusted for under-reporting

Tine Buch-Kromann, Martin Englund, Jim Gustafsson, Jens Perch Nielsen and Fredrik Thuring

Scandinavian Actuarial Journal, 2007, vol. 2007, issue 4, 293-304

Abstract: Not all claims are reported when a database for financial operational risk is created. The probability of reporting increases with the size of the operational risk loss, and converges towards one for big losses. Losses in operational risk have different causes, and usually follow a wide variety of distributional shapes. Therefore, a method for modelling operational risk based on one or two parametric models is deemed to fail. In this paper, we introduce a semi-parametric method for modelling operational risk that is capable of taking under-reporting into account and being guided by prior knowledge of the distributional shape.

Date: 2007
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DOI: 10.1080/03461230701642471

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