Zurich Insurance Policy Lowers Banks’ Operational Risk Capital Needs

December 18, 2013

Zurich Insurance Group AG, Switzerland’s biggest insurer, plans to offer banks a way to lower the amount of capital they need to hold for operational risks such as employee misconduct as regulators boost demands.

Under the policy, which is pending regulatory approval, the insurer would agree to cover losses from events including internal fraud, unauthorized trading in investment banking, or employee theft, Paul Schiavone, the global chief underwriting officer for specialty lines, said in a phone interview from London. This would in turn lower the amount of capital a bank has to hold against such risks.

Regulators are asking banks to hold more capital against operational risks, such as litigation, after Europe’s biggest banks racked up more than $77 billion in legal costs since the financial crisis, data compiled by Bloomberg show. UBS AG, Switzerland’s biggest bank, was ordered to boost capital for operational risks this quarter by 50 percent, causing it to push back its profitability target by at least a year.

“Capital relief issues in the banking area are becoming hugely important,” Schiavone said. “We are looking at products where banks would buy insurance for their operational risks issues. These are normally risks that are not covered by traditional insurance.”

The Zurich-based insurer has been developing the product over the last two years and aims to start selling it by the end of 2015, Schiavone said.

UBS Hit

In September 2011, UBS was shaken by the discovery of a $2.3 billion loss from unauthorized trading caused by Kweku Adoboli, an employee at its investment bank in London at the time. The Zurich-based bank’s assets weighted for operational risk jumped by 9.5 billion francs ($10.7 billion), or 19 percent. As risk-weighted assets rise, banks must hold additional capital to make sure reserves meet requirements.

Credit Suisse Group AG, Switzerland’s second-biggest bank, has been in talks with the Swiss Financial Market Supervisory Authority since early 2012 about the models it uses to measure operational risk. The review, which is due to be completed this year, has already led to a 24 percent increase in the Zurich- based bank’s operational risk-weighted assets, according to company reports. The regulator may ask Credit Suisse to hold even more capital, though any demand would be much smaller than for UBS, a person familiar with the matter who asked not to be identified said this month.

Schiavone said Zurich Insurance would be the first to provide such capital-relief products for operational risks. “The bank would fund up to so much, and then the indemnity insurance would kick in,” he said.

–With assistance from Elena Logutenkova in Zurich. Editors: Mark Bentley, Jon Menon