Operational risk is the possibility of suffering a financial loss as a result of internal systems, personnel, processes, or other failures that could impair daily corporate operations. Losses may be incurred financially directly or indirectly.
Operational risk can be divided into five categories:
- legal risk
- Compliance risk
- Process risk
- People risk
- Systems risk.
There are five fundamental methods for managing risks:
- Avoidance
- Retention
- Spreading
- Loss Control and Prevention.
- Transfer (via Insurance and Contracts)
The key advantages of operational risk management include:
- Increasing the dependability of a company’s commercial operations.
- To increase the efficiency of its risk management procedures.
- Whenever there are dangers involved, make the decision-making process stronger.
Operational risk can result in financial loss, a competitive disadvantage, issues with employees or customers, and even business failure if it is not addressed. Therefore keeping in mind the goal of risk management that is to recognize possible issues before they arise so that risk-handling actions can be planned and implemented as necessary over the course of a project or product to reduce negative effects on accomplishing goals.
Allocating resources, transferring operational risk via insurance, and proactively reducing operational risk via product inspection and quality control are all examples of proactive risk management. All three pillars will often be involved in comprehensive operational risk management.
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