Modeling losses and rare events

Several techniques have been proposed for operational risk models. Unfortunately
there has not been a clear distinction between measuring operational risk and
modeling operational risk. The actuarial approach of measuring rare events across
the industry has led some to adopt the approach for a particular investment bank.
While this approach may be appropriate for industry-wide statistics it should be
used with care when applying it to a specific financial institution’s operations. A systematic method of modeling losses and rare events may include specific models
for individual firms. An outline of the approach for the investment banking example
is as follows: 408