Challenges for Operational Risk Modeling

Typical models for operational risk quantification capture management forecasts of risk event likelihood (probability) and its impact (dollar cost).
Today, there are new challenges for these assessments:
1) to support resource allocation decisions (investments), and
2) to become integrated into company risk reporting and management.
Additionally, assessments can used be to identify root causes of lagging performance. In my future posts, I will cover how operative risk assessments can early detect warnings of potential problems.

These risk models are classified into activities and functions. Functions are related to core operations, transaction support, customer service, trading management, and finance & accounting. Activities typically included are marketing & sales, financial processing, infrastructure, external, corporate event, and client intake.

Significant risk events can be identified by analyzing historical trends in the past function/activity patterns. These historical trends can be compiled from booked costs (eg. Legal provisions) and can create a more defensible rationale for this assessment. It can also be done by reviewing the historical KPIs and dashboards. More precisely, dashboards can be aligned to the risk management practice and its strategic agenda. Several indicators can track operational performance by using broad set of metrics on financial performance (ROI, growth), operational performance (product excellence, market share), and human talent (leadership, rotation, job satisfaction).

By adding historical costs trends and metrics (as KPIs and dashboards), the operational risk mapping can support decisions for new investment and to be integrated into the company reporting systems.