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Abstract "One of the major new features of Solvency II is that insurance companies must now devote a portion of their equity to covering their exposure to operational risks. The regulator has proposed two approaches to calculating this capital requirement: a standard and a more advanced approach. The standard approach is a simplified calculation of a percentage of premiums or reserves. The advanced approach uses an internal model of risk that corresponds to the company’s real situation. The EIOPA has encouraged insurance companies to adopt the internal model by structuring the standard approach such that it uses up much more equity, as we noted in Quantitative Impact Study 5 (QIS5). This paper proposes an approach that distinguishes frequency risks from severity risks. Frequency risks are defined as the risk of suffering small losses frequently. They are modelled by the Loss Distribution Approach. Severity risks represent the risk of large but rare losses. They are modelled by Bayesian networks. Note: because we have modelled frequency and severity risks separately, the frequency risk model is much less sensitive to technical choices (adjusted distributions, aggregation)."

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