Cost of Risk — the cost of managing risks and incurring losses. Total cost of risk is the sum of all aspects of an organization's operations that relate to risk, including retained (uninsured) losses and related loss adjustment expenses, risk control costs, transfer costs, and administrative costs. Show
IFRS 9 (2014) was issued as a complete standard including the requirements previously issued and the additional amendments to introduce a new expected loss impairment model and limited changes to the classification and measurement requirements for financial assets. This amendment completes the IASB’s financial instruments project and the Standard is effective for reporting periods beginning on or after 1 January 2018 with early adoption permitted (subject to local endorsement requirements).12 September 2016IASB issues Applying IFRS 9 'Financial Instruments' with IFRS 4 'Insurance Contracts' (Amendments to IFRS 4) to address concerns about the different effective dates of IFRS 9 and the new insurance contracts standardAn entity choosing to apply the overlay approach retrospectively to qualifying financial assets does so when it first applies IFRS 9. An entity choosing to apply the deferral approach does so for annual periods beginning on or after 1 January 2018. The application of both approaches is optional and an entity is permitted to stop applying them before the new insurance contracts standard is applied. The meaning of the word hazard can be confusing. Often dictionaries do not give specific definitions or combine it with the term "risk". For example, one dictionary defines hazard as "a danger or risk" which helps explain why many people use the terms interchangeably. There are many definitions for hazard but the most common definition when talking about workplace health and safety is: A hazard is any source of potential damage, harm or adverse health effects on something or someone. Basically, a hazard is the potential for harm or an adverse effect (for example, to people as health effects, to organizations as property or equipment losses, or to the environment). Sometimes the resulting harm is referred to as the hazard instead of the actual source of the hazard. For example, the disease tuberculosis (TB) might be called a "hazard" by some but, in general, the TB-causing bacteria (Mycobacterium tuberculosis) would be considered the "hazard" or "hazardous biological agent". Operational risk is the risk of losses caused by flawed or failed processes, policies, systems or events that disrupt business operations. Employee errors, criminal activity such as fraud, and physical events are among the factors that can trigger operational risk. Most organizations accept that their people and processes will inherently incur errors and contribute to ineffective operations. In evaluating operational risk, practical remedial steps should be emphasized to eliminate exposures and ensure successful responses. If left unaddressed, the incurrence of operational risk can cause monetary loss, competitive disadvantage, employee- or customer-related problems, and business failure.  What are the causes of operational risk?The causes of operational risk can stem from people inside or outside the organization, technology, processes or even external events, including the following: This article is part of What is risk management and why is it important?
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People and decisions made by people (human error) tend to cause most operational risks. What are examples of operational risks?The above-mentioned causes of operational risks may result in one of more of the following outcomes:
See also Basel II event categories below. How is operational risk measured?Two things are generally required to measure operational risk: key risk indicators (KRIs) and data. Measurement, however, can be especially challenging when organizations are unable to integrate all the diverse types of data required to understand the organization's operational risk. This might be due to the absence of software that enables the collection of data from different systems and the analysis of that data or to data silos erected by organizational fiefdoms, among other factors. As organizations become increasingly digital, thereby utilizing more data, operational risk managers should continually monitor and assess risks in real time to minimize their potential impact. What key risk indicators should businesses track? That depends on the industry in which they operate. For example, banks follow guidance from the Basel Committee on Banking Supervision (BCBS), which lays out approaches for measuring operational risk and requires banks to allocate a certain amount of capital to cover losses from operational risk. Some of the ways companies can measure operational risk, not all of which are ideal, are the following:
Basel II event categoriesBasel II, a set of international banking regulations initially published in 2004, is the second of three Basel Accords created by BCBS -- Basel III, developed in direct response to the financial crisis, goes into effect in January 2023. Here are the seven categories of operational risk laid out in Basel II:
Challenges with assessing operational riskAssessing and managing operational risk can be difficult given the following:
What are the steps in operational risk management?Some organizations have a formal operational risk management function, while others don't. Those that have them tend to be at different stages of maturity. However, these are the steps companies follow: What is the possibility of financial loss called?Financial risk is the possibility of losing money on an investment or business venture. Some more common and distinct financial risks include credit risk, liquidity risk, and operational risk.
Which of the following can be defined as a cause of a loss?Answer: D. The actual cause of a loss is called a peril and is identified or referred to in the insurance policy. Perils include such events as fire, wind, hail, and collision with another car.
Which term describes the chance or likelihood of a loss?Risk, peril, and hazard are terms used to indicate the possibility of loss, and are often used interchangeably, but the insurance industry distinguishes these terms. A risk is simply the possibility of a loss, but a peril is a cause of loss. A hazard is a condition that increases the possibility of loss.
Which type of risk carries a chance of loss or gain?A speculative risk has the potential to result in a gain or a loss. It requires input from the person looking to assume the risk and is therefore entirely voluntary in nature. At the same time, the result of a speculative risk is hard to anticipate, as the exact amount of gain or loss is unknown.
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