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FRM Part II · FRM Exam Part II · Risk Identification

A bank records a USD 10 million loss from a rogue trader in 2021. By 2024 it discovers USD 4 million of related legal costs and recovers USD 1 million through insurance. For loss event data, which treatment is most consistent with good practice?

Gross loss should be USD 14 million (10 plus 4 of legal costs) linked to the original event, with the USD 1 million insurance recovery recorded separately, giving a net loss of USD 13 million. Splitting the event or omitting legal costs would distort severity data.

  1. ARecord gross loss as USD 14 million linked to the original event date, with USD 1 million shown as a recovery and net loss of USD 13 millionCorrect
  2. BRecord a new separate event of USD 4 million in 2024 with no link to the original
  3. CRecord net loss as USD 9 million and discard the legal costs
  4. DRecord only the USD 10 million since later costs are not operational losses

Explanation

Related later costs belong to the original event, so gross loss is 10 + 4 = 14 million. Recoveries are tracked separately: 14 − 1 = 13 million net. Splitting the event or ignoring legal costs distorts severity data; netting recoveries into gross hides the real exposure.

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