Operational Risk is one of the most difficult risks to model. It is a large and diverse category covering anything from cyber losses to mis-selling fines; and from processing errors to HR issues. Data is usually lacking, particularly for low frequency, high impact losses, and consequently there can be a heavy reliance on expert judgement. This paper seeks to help actuaries and other risk professionals tasked with the challenge of validating models of operational risks. It covers the loss distribution and scenario-based approaches most commonly used to model operational risks, as well as Bayesian Networks. It aims to give a comprehensive yet practical guide to how one may validate each of these and provide assurance that the model is appropriate for a firm’s operational risk profile.

Given a combinatorial search problem, it may be highly useful to enumerate its (all) solutions besides just finding one solution, or showing that none exists. The same can be stated about optimal solutions if an objective function is provided. This work goes beyond the bare enumeration of optimal solutions and addresses the computational task of solution enumeration by optimality (SEO). This task is studied in the context of answer set programming (ASP) where (optimal) solutions of a problem are captured with the answer sets of a logic program encoding the problem. Existing answer set solvers already support the enumeration of all (optimal) answer sets. However, in this work, we generalize the enumeration of optimal answer sets beyond strictly optimal ones, giving rise to the idea of answer set enumeration in the order of optimality (ASEO). This approach is applicable up to the best k answer sets or in an unlimited setting, which amounts to a process of sorting answer sets based on the objective function. As the main contribution of this work, we present the first general algorithms for the aforementioned tasks of answer set enumeration. Moreover, we illustrate the potential use cases of ASEO. First, we study how efficiently access to the next-best solutions can be achieved in a number of optimization problems that have been formalized and solved in ASP. Second, we show that ASEO provides us with an effective sampling technique for Bayesian networks.

Certain hypotheses cannot be directly confirmed for theoretical, practical, or moral reasons. For some of these hypotheses, however, there might be a workaround: confirmation based on analogical reasoning. In this paper we take up Dardashti, Hartmann, Thébault, and Winsberg’s (2019) idea of analyzing confirmation based on analogical inference Bayesian style. We identify three types of confirmation by analogy and show that Dardashti et al.’s approach can cover two of them. We then highlight possible problems with their model as a general approach to analogical inference and argue that these problems can be avoided by supplementing Bayesian update with Jeffrey conditionalization.

The relation between the understanding and belief of the site-specific dangers of climate change and the behaviour that individuals take to mitigate their impacts was assessed to investigate the psychological antecedent to pro-environmental behaviour; a necessity to mitigate anthropogenic climate change at the individual level. A quantitative cross-sectional design was employed to measure beliefs and behaviour of university students. Correlation was measured between the belief in one’s ability to affect change and pro-environmental behaviour. The hypothesis that nations facing greater climate threat would behave accordingly was tested on the two largest national representatives of the sample, China and Australia. In addition, a naïve Bayesian network, coupled with a self-organising map, was developed to explore correlations between self-efficacy and participants’ socio-demographic features. Results showed that Chinese students are more likely to have higher self-efficacy, while such trend was not noticed for Australians. Similarly, participants with higher educational qualifications, older, and with higher paid jobs also have a higher chance of presenting pro-environmental behaviour. Despite the study limitations, there seems to be evidence suggesting that educational and climate change policies have affected students’ self-efficacy and individual commitment to mitigation.

Bayesian networks are convenient graphical expressions for high-dimensional probability distributions which represent complex relationships between a large number of random variables. They have been employed extensively in areas such as bioinformatics, artificial intelligence, diagnosis, and risk management. The recovery of the structure of a network from data is of prime importance for the purposes of modeling, analysis, and prediction. There has been a great deal of interest in recent years in the NP-hard problem of learning the structure of a Bayesian network from observed data. Typically, one assigns a score to various structures and the search becomes an optimization problem that can be approached with either deterministic or stochastic methods. In this paper, we introduce a new search strategy where one walks through the space of graphs by modeling the appearance and disappearance of edges as a birth and death process. We compare our novel approach with the popular Metropolis–Hastings search strategy and give empirical evidence that the birth and death process has superior mixing properties.

Risk aggregation is a popular method used to estimate the sum of a collection of financial assets or events, where each asset or event is modelled as a random variable. Applications include insurance, operational risk, stress testing and sensitivity analysis. In practice, the sum of a set of random variables involves the use of two well-known mathematical operations: n-fold convolution (for a fixed number n) and N-fold convolution, defined as the compound sum of a frequency distribution N and a severity distribution, where the number of constant n-fold convolutions is determined by N, where the severity and frequency variables are independent, and continuous, currently numerical solutions such as, Panjer’s recursion, fast Fourier transforms and Monte Carlo simulation produce acceptable results. However, they have not been designed to cope with new modelling challenges that require hybrid models containing discrete explanatory (regime switching) variables or where discrete and continuous variables are inter-dependent and may influence the severity and frequency in complex, non-linear, ways. This paper describes a Bayesian Factorisation and Elimination (BFE) algorithm that performs convolution on the hybrid models required to aggregate risk in the presence of causal dependencies. This algorithm exploits a number of advances from the field of Bayesian Networks, covering methods to approximate statistical and conditionally deterministic functions to factorise multivariate distributions for efficient computation. Experiments show that BFE is as accurate on conventional problems as competing methods. For more difficult hybrid problems BFE can provide a more general solution that the others cannot offer. In addition, the BFE approach can be easily extended to perform deconvolution for the purposes of stress testing and sensitivity analysis in a way that competing methods do not.

This paper argues that most of the problems that actuaries have to deal with in the context of non-life insurance can be usefully cast in the framework of computational intelligence (a.k.a. artificial intelligence), the discipline that studies the design of agents which exhibit intelligent behaviour. Finding an adequate framework for actuarial problems has more than a simply theoretical interest: it also allows a technological transfer from the computational intelligence discipline to general insurance, wherever techniques have been developed for problems which are common to both contexts. This has already happened in the past (neural networks, clustering, data mining have all found applications to general insurance) but not in a systematic way. One of the objectives of this paper will therefore be to introduce some useful techniques such as sparsity-based regularisation and dynamic decision networks that are not yet known to the wider actuarial community.

Whilst in the first part of this paper we dealt mainly with data-driven loss modelling under the assumption that all the data were accurate and fully relevant to the exercise, in this second part of the paper we explore how to deal with uncertain knowledge, whether this uncertainty comes from the fact that the data are not fully reliable (e.g. they are estimates) or from the fact that the knowledge is “soft” (e.g. expert beliefs) or not fully relevant (e.g. market information on a given risk). Most importantly, we will deal with the problem of making pricing, reserving and capital decisions under uncertainty. It will be concluded that a Bayesian framework is the most adequate for dealing with uncertainty, and we will present a number of computational intelligence techniques to do this in practice.

The relative contributions of fat-free mass (FFM) and fat mass (FM) to body weight are key indicators for several major public health issues. Predictive models could offer new insights into body composition analysis. A non-parametric equation derived from a probabilistic Bayesian network (BN) was established by including sex, age, body weight and height. We hypothesised that it would be possible to assess the body composition of any subject from easily accessible covariables by selecting an adjusted FFM value within a reference dual-energy X-ray absorptiometry (DXA) measurement database (1999–2004 National Health and Nutrition Examination Survey (NHANES), n 10 402). FM was directly calculated as body weight minus FFM. A French DXA database (n 1140) was used (1) to adjust the model parameters (n 380) and (2) to cross-validate the model responses (n 760). French subjects were significantly different from American NHANES subjects with respect to age, weight and FM. Despite this different population context, BN prediction was highly reliable. Correlations between BN predictions and DXA measurements were significant for FFM (R2 0·94, P < 0·001, standard error of prediction (SEP) 2·82 kg) and the percentage of FM (FM%) (R2 0·81, P < 0·001, SEP 3·73 %). Two previously published linear models were applied to the subjects of the French database and compared with BN predictions. BN predictions were more accurate for both FFM and FM than those obtained from linear models. In addition, BN prediction generated stochastic variability in the FM% expressed in terms of BMI. The use of such predictions in large populations could be of interest for many public health issues.