PRMIA 8020 Exam - Topic 3 Question 21 Discussion

Overview of Basel II Approaches for Operational Risk

Basel II introduced three main approaches to calculating capital requirements for operational risk:

Basic Indicator Approach (BIA)

The Standardized Approach (TSA)

Advanced Measurement Approach (AMA)

Why Answer D is Correct

Alternative Measurement Approach (AMA) is not a recognized Basel II approach.

The correct term under Basel II was Advanced Measurement Approach (AMA).

Why Other Answers Are Incorrect

Option

Explanation

A . Basic Indicator Approach (BIA).

Correct -- A simple approach where capital is set as a fixed percentage of gross income.

B . The Standardized Approach (TSA).

Correct -- Categorizes operational risk into business lines, each with assigned risk factors.

C . Advanced Measurement Approach (AMA).

Correct -- Uses internal models to calculate capital requirements based on loss data, scenario analysis, and risk controls.

PRMIA Reference for Verification

Basel II Framework for Operational Risk (2004)

PRMIA Risk Management Guidelines