Description: This paper employs the theory of real option pricing to address problems in the area of operational risk management. Particularly, it develops a two-stage model to help firms determine the optimal triggers in the event of an influenza pandemic. The first stage proposes a regime-dependent epidemic model to simulate the spread of the virus, depending on whether the firm is active or inactive. The second stage views the reactivation decision as a call option and the suspension decision as a put option, and uses dynamic programming method to determine the optimal switching thresholds.

Description: Article describing key steps to develop an incentive compensation plan that aligns to the company’s risk profile, mitigate excessive risk taking, retain talent and meet the disclosure requirements. The yearly development cycle includes develop the incentive compensation program, communicate and implement and assess the plan performance on both short and long term horizon.

Description: This article presents claw-back features, option (barrier option, short put option and convertible deferred cash compensation) as possible tools in incentive compensation programs.

Description: List organizations types that does not have incentive that is aligned with public interest or interest of the organization itself.

Description: This paper defines business risk as uncertainty that threatens the viability of the insurance organization including product features such as mortality or persistency, internal organization features such as expenses or staff retentionand external influences such as regulatory or legal actions. This paper provides an approach for measuring the financial impact of adverse variation of these factors on the organization.

Description: Recently researchers, practitioners, and regulators had intense debates about how to treat the data collection threshold in operational risk modeling. There are several approaches under consideration—the empirical approach, the “naive” approach, the shifted approach, and the truncated approach—for fitting the loss severity distribution. Since each approach is based on a different set of assumptions, different probability models emerge. Thus, model uncertainty arises. When possible we investigate such model uncertainty analytically, otherwise we use Monte Carlo simulations. For specific parametric examples we consider exponential and Lomax distributions which are special cases of the generalized Pareto family. Our primary goal is to quantify the effect of model uncertainty on risk measurements. This is accomplished by evaluating the probability of each approach producing conservative capital allocations based on the value-at-risk measure. These explorations are further illustrated using a real data set for legal losses in a business unit (Cruz, 2002).

Description: This article discusses incentive compensation metrics set to motivate performance, retain people, satisfy legal constraints and Say-on-pay and promote good risk management. Alignment discussion between actual metrics characteristics and the behavior they promote.

Description: This article advocates for a lower variable part in salary and increase focus on other mechanisms (goal setting, simpler product, management, culture and processes). The psychological aspect of belonging to the incentive compensation pool is more important that the financial aspect.

Description: Response to David Kausch’s comments on the paper.

Description: The April 2016 Issue of The Modeling Platform