Estimation of Operative Risk for Fraud in the Car Insurance Industry

The regulatory framework for assessing and risk measurement in most companies focuses primarily on proposals of the New Capital Accord (Basel II). The Basel Committee gives importance to the concept of operational risk and requires that financial institutions cover possible loses with capital. The goal is to identify expected losses because of different events that might arise in firm management. This work develops a model to estimate the monetary loss due to car theft for Columbian insurance companies. We estimate the probability functions of monetary losses for car theft. First we estimate the distribution functions of the number of car thefts and for the monetary loss. Then, we use Monte Carlo simulation to identify the severity of expected losses. The results and conclusions will be useful for insurance firms. Using the results here, they can set up guidelines to improve risk management