# Operational Risk Model

**Operational Risk Model Outline:**

- The Loss Distribution Approach (LDA) is followed with Bayesian inference used to derive the frequency and severity distributions.
- The parameters in the frequency and severity distributions are modeled by “posterior distributions” which are calculated via Bayesian inference.
- The posterior distribution is the product of the prior distribution and the likelihood functions.
- The prior and posterior distributions have the same form, which by definition is the conjugate prior of the distribution being modeled (whether frequency or severity).
- Structured scenario data is used to derive the prior distribution.
- Internal and external data are used to calculate the likelihood functions in the posterior distribution.