The determinants of frequency and severity of operational losses in Tunisian insurance industry

Abstract

Purpose

The purpose of this paper is to examine the determinants of operational losses in insurance companies.

Design/methodology/approach

By using most common estimates of frequency and severity of losses that affected business‐lines during 2009, the paper integrates a quantitative aspect that reflects the mode of organization in the insurance company. In this paper, it would be more appropriate to focus on the frequency and severity of losses estimated by insurers and which are related to each category of operational risk events that took place in 2009.

Findings

The paper finds that the frequency of operational losses is positively related to the Market Share (MARKSHARE) and the Rate of Geographic Location (RAGELOC). However, the occurrence of loss is negatively related to the Variety of Insurance Activities (VARIACT). The paper also found a decrease in the frequency of losses associated with a large number of employees. Therefore, there is a significant relationship between the Human Factor (HF) and the occurrence of operational losses. In terms of severity, the empirical study has shown that the probability of zero intensity of operational losses is negatively influenced by the Market Share (MARKSHARE) and the Rate of Geographic Location (RAGELOC). In the same framework, the Variety of Insurance Activities (VARIACT) has a negative effect on the probability of high operational loss severity.

Originality/value

Despite the absence of the quantitative data of operational risk, this article will discover a new research perspective to estimate the frequency and severity of operational losses in the insurance sector in Tunisia.

Citation

Hemrit, W. and Ben Arab, M. (2012), "The determinants of frequency and severity of operational losses in Tunisian insurance industry", Journal of Risk Finance, Vol. 13 No. 5, pp. 438-475. https://doi.org/10.1108/15265941211273759