Algorithmics awarded patent for operational risk capital modeling framework

Date: Monday, February 7, 2011
Author: Hedgeweek.com

Algorithmics, a provider of risk solutions, has been awarded a patent for its operational risk capital modeling framework. The patent recognises Algorithmics’ investment in its operational risk solutions at a time when operational risk management is receiving considerable regulatory attention. The patented capital modeling framework will be offered as an extension to Algorithmics’ Algo OpVar operational risk management software. It represents a framework and technology for calibrating, simulating and measuring operational risk and provides robust data analysis combined with sophisticated tools for modeling loss events. The framework provides a method for aggregating loss estimates, using a combination of the actuarial technique of estimating frequency and severity separately, and combining these using Monte-Carlo simulation to produce an overall estimate. By performing these calculations for the individual business lines and risk types, and then combining these estimates, clients can arrive at a “bottom-up” estimate for their overall operational risk exposure. Ben De Prisco, Senior Vice President of Research and Financial Engineering at Algorithmics, says: “This technology represents a significant advance in the area of operational risk modelling and measurement – which is particularly timely, given the increasing regulatory recognition of the importance of operational risk. Capital remains one of the most powerful tools in the regulator’s armoury to control financial institutions. Basel III is adding yet more stringent capital requirements on the banks, and Solvency II is doing the same for insurance companies. “The capital modelling framework provides these institutions with the ability to analyse their loss data in a meaningful and structured way. The patented techniques, implemented in the Algo OpVar capital modelling extension, use internal and external loss data, taken from Algorithmics’ loss databases (Algo FIRST and Algo OpData), to give management a good estimate of the capital required to cover these types of risk and can help them decide where to invest in additional controls or where to make changes to the business to minimise their exposure. The end result is a comprehensive and transparent approach to measuring and managing operational risk.” Michael Zerbs (pictured), President and COO, Algorithmics, adds: “This latest patent is yet another example of our commitment to research and innovation in risk management technology and further extends our patent portfolio. We will continue to invest in cutting-edge research to ensure we provide risk solutions that help our clients create value.”