Operational Risk: Solvency II and Culture of Risk Analysis

1. Operational Risk
Solvency II and Culture of Risk Analysis
Ignacio Reclusa
Risk Management and Insurance
July 2014

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1. Introduction
2. Business case: Culture of Risk Analysis
Index

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• Measuring culture of risk embeddedness is not an easy task for Operational Risk practitioners.
• In the following sides we will present a basic model to analyze the culture of risk within the organization.
This process has four steps, but we will focus just in step 1 and 4 (steps 2 and 3 have been analyzed in
other presentations).
• The Culture of Risk Analysis is founded in professors'’ Vroom and Lawler Expectancy theory. This theory
describes three elements: Expectancy, Instrumentality and Valence. This elements in combination can be
summarized in the following adapted formula:
• On the other size, there are at least four attributes which describe the culture of risk within the organization:
Leadership style, Capabilities, Governance system and Decision making.
• It is very important to bear in mind that the result of this formula is just a way to express a qualitative
assessment into a semi-quantitative figure. But most important of all is to monitor trends and compare it with
the benchmark.
1. Introduction
Questionnaire
Descriptive
statistics
Accurateness of
self- uestionnaire
Global culture of
risk scoring
1 2 3 4

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2. Business Case: Culture of Risk Analysis
Phase 1: Questionnaire
Expectancy To what extent it is possible that your area will achieve the
following if you do your job specially well?
Scoring Expectancy theory
(Vroom & Lawler)
Attributes
1 You will become a risk champion / leader 7 Expectancy Leadership style
2 When a operational risk event takes place, your first
reaction is to manage it rather than looking for a guilty
6 Expectancy Leadership style
3 To attract business partners / risk owners within the
organization
5 Expectancy Capabilities
4 To increase risk awareness in the organization 7 Expectancy Capabilities
5 To monitor properly the risk universe of your organization 7 Expectancy Governance system
6 To provide transparent reports to the Board Committee 9 Expectancy Governance system
7 To make better decisions based on risks 7 Expectancy Decision making
8 To match risk based incentives with right management 7 Expectancy Decision making
9 To be seen as a risk champion / leader 6 Instrumentality Leadership style
10 People in the organization feels free to report operational
risk events
5 Instrumentality Leadership style
11 To have the right risk resources within your department 4 Instrumentality Capabilities
12 To enhance risk skills (technical and non-technical) in your
area
6 Instrumentality Capabilities
13 To have the right risk information from risk owners 6 Instrumentality Governance system
14 To feel free to report risk information to the Board
Committee
7 Instrumentality Governance system
15 To see better decisions made at the top level 6 Instrumentality Decision making
16 To have reward systems that take into account risk
management
6 Instrumentality Decision making
17 Hard work => High performance 5 Valence Not applicable
18 Hard work => Good job been done 7 Valence Not applicable
19 Hard work => High recognition within the organization 3 Valence Not applicable

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Leadership style
Expectancy Instrumentality
Product
Question Score Question Score
1 7 9 6 39
2 6 10 5 29
SUB-TOTAL 1: 68
Governance system
Expectancy Instrumentality
Product
Question Score Question Score
3 5 11 4 20
4 7 12 6 39
SUB-TOTAL 2: 59
Capabilities
Expectancy Instrumentality
Product
Question Score Question Score
5 7 13 6 39
6 9 14 7 65
SUB-TOTAL 3: 104
Decision making
Expectancy Instrumentality
Product
Question Score Question Score
7 7 15 6 39
8 7 16 6 39
SUB-TOTAL 4: 78
Leadership style:
68 points
Governance system:
59 points
Capabilities:
104 points
Decision making:
78 points
Culture of
Risk Score:
2.322 points
Valence
Factor Score
17 5
18 7
19 3
SUB-TOTAL 5: 15
2. Business Case: Culture of Risk Analysis
Phase 4: Global culture of risk scoring

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Brief Bio
International Risk Management and Insurance senior
management expert, with over 13 years of experience in the
industry.
I have a broad experience in helping organizations step up
to their true potential. Uniquely positioned to talk about
operational risks and how to turn productivity into a healthier
organization.
I have lectured to professional groups and business
audiences.
Ignacio Reclusa
Risk Management and Insurance
M +34 677 023 800
www.ignacioreclusa.com
ignacioreclusa@gmail.com